ABBOTT LABORATORIES Financial Review - Results of Operations
Abbott's revenues are derived primarily from the sale of a broad line of health care products under short-term receivable arrangements. Patent protection and licenses, technological and performance features, and inclusion of Abbott's products under a contract impact which products are sold; price controls, competition and rebates impact the net selling prices of products; and foreign currency translation impacts the measurement of net sales and costs. Abbott's primary products are medical devices, diagnostic testing products, nutritional products and branded generic pharmaceuticals. During the first six months of 2020, the coronavirus (COVID-19) pandemic affected Abbott's diversified health care businesses in various ways. As is further described below, some businesses faced challenges, others have been relatively stable, and still others are performing at the levels required to successfully meet new demands. Beginning in February, cardiovascular and neuromodulation procedures and routine core laboratory diagnostic testing volumes declined inChina as that country implemented quarantine restrictions and postponed non-emergency health care activities. As March progressed, procedures and routine testing volumes inChina steadily improved from the
low levels seen in February.
As COVID-19 spread geographically, the impact initially expanded to certain countries inAsia andEurope beginning in late February, and more broadly acrossEurope and theU.S. during March and April. As the health care systems in these countries shifted their focus to fighting COVID-19, the impact on cardiovascular and neuromodulation device procedures and routine diagnostic testing volumes was similar to what was experienced inChina in February. As a result, as is further described below, sales of cardiovascular and neuromodulation devices and routine diagnostic tests declined during the first six months of 2020 from the prior year. Encouragingly, routine testing and procedure volume improved across Abbott's hospital-based businesses as the second quarter progressed as both demand for procedures and availability of health care resources began to return to more normal levels.
Abbott mobilized its teams across multiple fronts to develop and launch six new diagnostic tests for COVID-19:
In March, Abbott launched a molecular test on its m2000™ RealTime lab-based
? platform to detect COVID-19 pursuant to an Emergency Use Authorization (EUA) in
the
? In March, Abbott also launched a molecular test to detect COVID-19 on its ID
NOW™ rapid point-of-care platform in the
In April, Abbott launched a lab-based serology blood test on its ARCHITECT®
? i1000SR and i2000SR® laboratory instruments for the detection of an antibody to
determine if someone was previously infected with the virus. The serology test
was granted an EUA in the
? In May, Abbott launched a lab-based serology blood test on its Alinity® i
system pursuant to an EUA in the
In May, Abbott also launched a molecular test on its Alinity m system to detect
? COVID-19 pursuant to an EUA in the
in
In June, Abbott launched a lateral flow COVID-19 rapid antibody test on its
? Panbio™ system in select countries. This serology test detects an antibody to
determine if someone was previously infected with the virus. During the first six months of 2020, Abbott's COVID-19 testing related sales totaled$652 million , of which the vast majority were generated in the second quarter of 2020.
Abbott is continually implementing business continuity plans in the face of the pandemic. Due to the critical nature of its products and services, Abbott was generally exempt from governmental orders issued during the first quarter of 2020 in theU.S. and other countries requiring businesses to cease operations. The majority of its office-based work was conducted remotely during the period of such governmental orders and the company implemented strict travel restrictions. As governmental orders were lifted in May andJune 2020 , Abbott entered a new phase in its operations whereby some office-based employees started working at Abbott's offices on a rotational basis. Abbott has taken aggressive steps to limit exposure and enhance the safety of its facilities for employees working to continue to supply healthcare products to hospital and other customers. With respect to Abbott's financial position, atJune 30, 2020 , Abbott's cash and cash equivalents and short-term investments totaled approximately$5.0 billion compared to$4.1 billion atDecember 31, 2019 . The increase includes the impact of a$1.3 billion bond offering that was completed inJune 2020 . Existing credit agreements are in place that would provide additional access to$5 billion , if needed. Due to the unpredictability of the duration and impact of the current COVID-19 pandemic, the extent to which the COVID-19 pandemic may have a material effect on its business, financial condition or results of operations is uncertain.
18
Table of Contents
The following table details sales by reportable segment for the three and six
months ended June 30 . Percent changes are versus the prior year and are based
on unrounded numbers.
Net Sales to External Customers
Three Months Three Months
Ended Ended Impact of Total Change
June 30, June 30, Total Foreign Excl. Foreign
(in millions) 2020 2019 Change Exchange Exchange
Established Pharmaceutical Products $ 1,013 $ 1,108 (8.6) % (7.9) % (0.7) %
Nutritional Products 1,883 1,875 0.4 (2.7) 3.1
Diagnostic Products 1,994 1,905 4.7 (2.4) 7.1
Medical Devices 2,423 3,075 (21.2) (1.3) (19.9)
Total Reportable Segments 7,313 7,963 (8.2) (2.8) (5.4)
Other 15 16 (11.3) (1.0) (10.3)
Net Sales $ 7,328 $ 7,979 (8.2) (2.8) (5.4)
Total U.S. $ 2,638 $ 2,850 (7.4) - (7.4)
Total International $ 4,690 $ 5,129 (8.6) (4.4) (4.2)
Net Sales to External Customers
Six Months Six Months
Ended Ended Impact of Total Change
June 30, June 30, Total Foreign Excl. Foreign
(in millions) 2020 2019 Change Exchange Exchange
Established Pharmaceutical Products $ 2,057 $ 2,100 (2.1) % (6.1) % 4.0 %
Nutritional Products 3,787 3,667 3.3 (1.8) 5.1
Diagnostic Products 3,820 3,746 2.0 (2.0) 4.0
Medical Devices 5,360 5,970 (10.2) (1.4) (8.8)
Total Reportable Segments 15,024 15,483 (3.0) (2.3) (0.7)
Other 30 31 (3.4) (1.1) (2.3)
Net Sales $ 15,054 $ 15,514 (3.0) (2.3) (0.7)
Total U.S. $ 5,494 $ 5,604 (1.9) - (1.9)
Total International $ 9,560 $ 9,910 (3.5) (3.5) -
Note: In order to compute results excluding the impact of exchange rates,
current year
The 5.4 percent decrease in total net sales in the second quarter of 2020, excluding the impact of foreign exchange, was primarily driven by a decrease in the Medical Devices segment as a result of the COVID-19 pandemic. Abbott's net sales were unfavorably impacted by changes in foreign exchange rates during the period compared to the second quarter of 2019. The relatively strongerU.S. dollar decreased total international sales by 4.4 percent and total sales by 2.8 percent in the second quarter of 2020. The 0.7 percent decrease in total net sales during the first six months of 2020, excluding the impact of foreign exchange, was driven by a decrease in the Medical Devices segment due to reduced procedure volumes as a result of the pandemic. The decrease in the Medical Devices segment was mostly offset by growth in the Nutritional Products, Diagnostics andEstablished Pharmaceuticals segments. Abbott's net sales were unfavorably impacted by changes in foreign exchange rates in the first six months of 2020 as the relatively strongerU.S. dollar decreased total international sales by 3.5 percent and total sales by 2.3 percent. 19 Table of Contents The table below provides detail by sales category for the six months endedJune 30 . Percent changes are versus the prior year and are based on unrounded numbers. Impact of Total Change June 30, June 30, Total Foreign Excl. Foreign (in millions) 2020 2019 Change Exchange ExchangeEstablished Pharmaceutical Products - Key Emerging Markets$ 1,577 $ 1,605 (1.7) % (7.6) % 5.9 % Other Emerging Markets 480 495 (3.1) (1.0) (2.1) Nutritionals - International Pediatric Nutritionals 1,111 1,152 (3.6) (2.6) (1.0) U.S. Pediatric Nutritionals 1,002 928 8.0 - 8.0 International Adult Nutritionals 1,056 982 7.6 (3.9) 11.5 U.S. Adult Nutritionals 618 605 2.2 - 2.2 Diagnostics - Core Laboratory 1,976 2,230 (11.4) (2.2) (9.2) Molecular 498 215 131.1 (4.6) 135.7 Point of Care 256 280 (8.4) (0.6) (7.8) Rapid Diagnostics 1,090 1,021 6.8 (1.3) 8.1 Medical Devices - Rhythm Management 875 1,062 (17.6) (1.2) (16.4) Electrophysiology 687 835 (17.8) (0.8) (17.0) Heart Failure 361 385 (6.1) (0.5) (5.6) Vascular (a) 1,106 1,439 (23.1) (1.2) (21.9) Structural Heart 541 676 (20.0) (1.1) (18.9) Neuromodulation 283 405 (30.1) (0.6) (29.5) Diabetes Care 1,507 1,168 29.0 (2.9) 31.9 (a) Vascular Product Lines: Coronary and Endovascular 1,069 1,378 (22.4) (1.3) (21.1) Key Emerging Markets for theEstablished Pharmaceutical Products business includeIndia ,Russia ,Brazil andChina , along with several other markets that represent the most attractive long-term growth opportunities for Abbott's branded generics product portfolio. Excluding the unfavorable effect of foreign exchange, sales in the Key Emerging Markets increased 5.9 percent compared to the first six months of 2019 led primarily by growth inChina ,Russia ,India and various countries inLatin America . The six-month growth rate was negatively impacted by lower demand in the second quarter of 2020 due to the increased spread of COVID-19 across several emerging market countries. Other Emerging Markets, excluding the effect of foreign exchange, decreased by 2.1 percent in the first six months of 2020. 20
Table of Contents
International Pediatric Nutritional sales, excluding the effect of foreign exchange, decreased 1.0 percent in the first six months of 2020 versus the comparable 2019 period. Growth across Abbott's pediatric products in various countries inSoutheast Asia andLatin America was more than offset by challenging market dynamics in theGreater China infant category.U.S. Pediatric Nutritional sales increased 8.0 percent primarily due to increased demand for Pedialyte®, Abbott's oral rehydration brand. The 11.5 percent increase in International Adult Nutritional sales, excluding the effect of foreign exchange, reflects continued growth of the Glucerna® and Ensure® brands in several countries.U.S. Adult Nutritional sales increased 2.2 percent primarily due to growth in Ensure. In the Diagnostics segment,Core Laboratory sales decreased 9.2 percent, excluding the effect of foreign exchange, as the lower volume of routine testing performed in hospital and other laboratories due to COVID-19 was partially offset by sales of Abbott's COVID-19 laboratory-based tests for the detection of the IgG antibody, which determines if someone was previously infected with the virus. Core Laboratory IgG antibody testing-related sales on Abbott's ARCHITECT and Alinity i platforms were$152 million in the first six months of 2020. The 135.7 percent increase inMolecular Diagnostics sales, excluding the effect of foreign exchange, reflects higher volumes due to demand for Abbott's laboratory-based molecular tests for COVID-19 on its m2000 and Alinity m platforms. Molecular Diagnostics COVID-19 testing-related sales were$318 million in the first six months of 2020. InRapid Diagnostics , sales increased 8.1 percent, excluding the effect of foreign exchange, as strong demand for Abbott's point-of-care COVID-19 molecular test on its ID NOW platform in theU.S. and increased testing in the first quarter for the flu in theU.S. was partially offset by the unfavorable impact of COVID-19 on routine diagnostic testing. Rapid Diagnostics COVID-19 testing-related sales were$182 million in the first six months of 2020. Excluding the effect of foreign exchange, total Medical Devices sales decreased 8.8 percent; the decrease was driven by the impact of COVID-19 on Abbott's cardiovascular and neuromodulation businesses, partially offset by double-digit growth in Diabetes Care. Growth in Diabetes Care sales was driven by continued growth of FreeStyle Libre®, Abbott's continuous glucose monitoring system, internationally and in theU.S. FreeStyle Libre sales totaled$1.197 billion in the first six months of 2020, which reflected a 50.4 percent increase, excluding the effect of foreign exchange, over the first six months of 2019 when FreeStyle Libre sales totaled$812 million . In June, Abbott announcedU.S. Food and Drug Administration (FDA) clearance of FreeStyle Libre 2 as an integrated continuous glucose monitoring (iCGM) system for adults and children ages 4 and older with diabetes.
In Abbott's cardiovascular and neuromodulation businesses, revenues during the first six months of 2020 were negatively impacted by reduced procedure volumes due to COVID-19. Procedure volume trends improved over the course of the second quarter as both demand for procedures and availability of healthcare resources began to return to more normal levels. In April, Abbott announced CE Mark approval for its TriClip® heart valve repair system, the world's first minimally invasive, clip-based tricuspid heart valve repair device. In July, Abbott announcedU.S. FDA approval of its next-generation Gallant™ implantable cardioverter defibrillator and cardiac resynchronization therapy defibrillator devices to help manage heart rhythm disorders. These devices offer Bluetooth technology and a new patient smartphone app for improved remote monitoring and enhanced patient-physician engagement. InApril 2017 , Abbott received a warning letter from theU.S. FDA related to its manufacturing facility inSylmar, CA which was acquired by Abbott onJanuary 4, 2017 as part of the acquisition of St. Jude Medical. This facility manufactures implantable cardioverter defibrillators, cardiac resynchronization therapy defibrillators, and monitors. Abbott prepared and executed a comprehensive plan of corrective actions. OnApril 28, 2020 , Abbott received a letter from the FDA indicating that, based on theFDA's evaluation, it appeared that Abbott had addressed the items in the warning letter. As a result, the warning letter
is considered closed.
The gross profit margin percentage was 47.9 percent for the second quarter of 2020 compared to 52.8 percent for the second quarter of 2019. The gross profit margin percentage was 49.1 percent for the first six months of 2020 compared to 52.3 percent for the first six months of 2019. The decreases in the gross profit margin percentage primarily reflect the unfavorable impact of COVID-19 and the mix of geographical sales on the cardiovascular, neuromodulation and core diagnostic businesses, as well as the increase in intangible asset amortization and the unfavorable effect of foreign exchange on gross margin
in 2020.
Research and development expenses decreased by$13 million , or 2.1 percent, in the second quarter of 2020 and decreased by$107 million , or 8.6 percent, in the first six months of 2020 compared to the prior year. The decrease in the second quarter of 2020 reflects lower R&D spending in various businesses and the favorable effect of foreign exchange. The decrease in R&D spending in the first six months of 2020 primarily reflects the immediate expensing in the first quarter of 2019 of an R&D asset valued at$102 million , in conjunction with the acquisition ofCephea Valve Technologies, Inc. The decrease in R&D expense during the first six months of 2020 was also driven by the favorable effect of foreign exchange. For the six months endedJune 30, 2020 , research and development expenditures totaled$608 million for the Medical Devices segment,$270 million for the Diagnostic Products segment,$90 million for the Nutritional Products segment and$85 million for theEstablished Pharmaceutical Products segment. Selling, general and administrative (SG&A) expenses decreased 6.5 percent in the second quarter and decreased 1.8 percent in the first six months of 2020. The decrease in the quarter is primarily due to the favorable effect of foreign exchange, lower travel expenses due to COVID-19 mobility restrictions, and various cost saving initiatives to mitigate the unfavorable impact of COVID-19 on sales in 2020. The decrease in the first six months of 2020 is due primarily to the favorable effect of foreign exchange. Restructuring Plans
The results for the first six months of 2020 reflect charges under approved restructuring plans as part of the integration of the acquisitions ofSt. Jude Medical and Alere or as a part of various cost reduction programs. Abbott recorded employee related severance and other charges of$33 million in the first six months of 2020 related to these initiatives, of which$4 million is recognized in Cost of products sold,$2 million is recognized in Research and development and$27 million is recognized in SG&A. See Note 7 to the financial statements, "Restructuring Plans," for additional information regarding these charges. 21 Table of Contents Other (Income) Expense, net Other (income) expense, net totaled$22 million of expense in the second quarter of 2020 compared to$38 million of income in 2019 and$21 million of expense in the first six months of 2020 compared to$85 million of income in 2019. The changes in Other (income) expense, net primarily reflect equity investment impairments that totaled approximately$60 million in the second quarter of 2020 and$110 million in the first six months of 2020. Interest Expense, net
Interest expense, net decreased
Taxes on Earnings from Continuing Operations
Taxes on earnings from continuing operations reflect the estimated annual effective rates and include charges for interest and penalties. In the first six months of 2020, taxes on earnings from continuing operations include approximately$81 million in tax benefits related to the settlement of the former St. Jude Medical consolidated group's 2014 through 2016 federal income tax returns in theU.S. and$67 million in excess tax benefits associated with share-based compensation. Earnings from discontinued operations, net of tax, in the first six months of 2020 reflect the recognition of$20 million of net tax benefits primarily as a result of the resolution of various tax positions related to prior years. In the first six months of 2019, taxes on earnings from continuing operations include a$78 million reduction to the transition tax related to the Tax Cut and Jobs Act (TCJA) and approximately$90 million in excess tax benefits associated with share-based compensation. The$78 million reduction to the transition tax liability was the result of the issuance of final transition tax regulations by theU.S. Department of Treasury in the
first quarter of 2019. Tax authorities in various jurisdictions regularly review Abbott's income tax filings. Abbott believes that it is reasonably possible that the recorded amount of gross unrecognized tax benefits may decrease between$70 million and$410 million , including cash adjustments, within the next twelve months as a result of concluding various domestic and international tax matters. In theU.S. , Abbott's federal income tax returns through 2016 are settled except for the federal income tax returns of the former Alere consolidated group which
are settled through 2015.
Liquidity and Capital Resources
OnJune 24, 2020 , Abbott completed the issuance of$1.3 billion aggregate principal amount of senior notes, consisting of$650 million of its 1.15% Notes due 2028 and$650 million of its 1.40% Notes due 2030. Abbott intends to use the net proceeds from the notes offering to repay the approximately$1.3 billion of 0.00% Notes dueSeptember 2020 . The$903 million increase in cash and cash equivalents from$3.9 billion atDecember 31, 2019 to$4.8 billion atJune 30, 2020 primarily reflects the proceeds from the issuance of$1.3 billion of debt and the favorable impact of cash generated by operating activities, partially offset by the payment of dividends and capital expenditures. Working capital was$6.3 billion atJune 30, 2020 and$4.8 billion atDecember 31, 2019 . The$1.5 billion increase was due in large part to the higher level of cash and cash equivalents noted above as well as an increase in inventory related to shifting demand dynamics. In the Condensed Consolidated Statement of Cash Flows, Net cash from operating activities for the first six months of 2020 totaled$2.0 billion , an increase of$265 million over the prior year due primarily to a decrease in cash taxes paid, payment timing for various accrued expenses and lower interest payments, partially offset by lower earnings from operations. Other, net in Net cash from operating activities for the first six months of 2020 was a use of$205 million and includes the impact of the payment of cash taxes of approximately$285 million and$335 million of pension contributions, partially offset by payment timing for various accrued expenses and the impact of non-cash charges related to equity investment impairments. Other, net in Net cash from operating activities for the first six months of 2019 was a use of$875 million and includes$326 million of pension contributions and the payment of cash taxes of approximately$615 million . Abbott expects to fund cash dividends, capital expenditures and its other investments in its businesses with cash flow from operating activities, cash on hand, short-term investments and borrowings. InSeptember 2019 , the board of directors authorized the early redemption of up to$5 billion of outstanding long-term notes. This bond redemption authorization superseded the board's previous authorization under which$700 million had not yet been redeemed. InDecember 2019 , Abbott redeemed$2.850 billion of debt. After this redemption,$2.15 billion of the$5 billion debt redemption authorization remains available. AtJune 30, 2020 , Abbott's long-term debt rating was A- byStandard & Poor's Corporation and A3 by Moody's Investors Service. Abbott expects to maintain an investment grade rating. Abbott has readily available financial resources, including lines of credit of$5.0 billion which expire in 2023. InOctober 2019 , the board of directors authorized the repurchase of up to$3 billion of Abbott's common shares from time to time. This authorization is in addition to the$270 million unused portion of the share repurchase program authorized in 2014. OnApril 27, 2016 , the board of directors authorized the issuance and sale for general corporate purposes of up to 75 million common shares that would result in proceeds of up to$3 billion . No shares have been issued under this authorization. In each of the first two quarters of 2020, Abbott declared a quarterly dividend of$0.36 per share on its common shares, which represents an increase of approximately 12.5 percent over the$0.32 per share quarterly dividend declared in each of the first two quarters of 2019. 22 Table of Contents
Recently Adopted Accounting Standards
InJune 2016 , theFinancial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2016-13, Financial Instruments - Credit Losses, which changes the methodology to be used to measure credit losses for certain financial instruments and financial assets, including trade receivables. The new methodology requires the recognition of an allowance that reflects the current estimate of credit losses expected to be incurred over the life of the financial asset. Abbott adopted the standard onJanuary 1, 2020 and recorded a cumulative adjustment that was not significant to Earnings employed in the business in the Condensed Consolidated Balance Sheet.
Recently Issued Accounting Standards Not Yet Adopted
InDecember 2019 , the FASB issued ASU 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes, which among other things, eliminates certain exceptions in the current rules regarding the approach for intraperiod tax allocations and the methodology for calculating income taxes in an interim period, and clarifies the accounting for transactions that result in a step-up in the tax basis of goodwill. The standard becomes effective for Abbott in the first quarter of 2021 and early adoption is permitted. Abbott does not expect adoption of this new standard to have a material impact on its condensed consolidated financial statements. Legislative Issues
Abbott's primary markets are highly competitive and subject to substantial government regulations throughout the world. Abbott expects debate to continue over the availability, method of delivery, and payment for health care products and services. It is not possible to predict the extent to which Abbott or the health care industry in general might be adversely affected by these factors in the future. A more complete discussion of these factors is contained in Item 1, Business, and Item 1A, Risk Factors, in the 2019 Annual Report on Form 10-K.
Private Securities Litigation Reform Act of 1995 - A Caution Concerning Forward-Looking Statements
Under the safe harbor provisions of the Private Securities Litigation Reform Act of 1995, Abbott cautions that any forward-looking statements made by Abbott are subject to risks and uncertainties, including the impact of the COVID-19 pandemic on Abbott's operations and financial results, that may cause actual results to differ materially from those indicated in the forward-looking statements. Economic, competitive, governmental, technological and other factors that may affect Abbott's operations are discussed in Item 1A, "Risk Factors'', in the 2019 Annual Report on Form 10-K and in Item 1A, "Risk Factors", in the Quarterly Report on Form 10-Q for the quarter endedMarch 31, 2020 . Abbott undertakes no obligation to release publicly any revisions to forward-looking statements as a result of subsequent events or developments, except as required by law.
© Edgar Online, source
