Abbott Laboratories 2016 Form 10-K Summary
Business context and reporting period
Abbott Laboratories reported for the fiscal year ended December 31, 2016. The company develops, manufactures, and sells healthcare products through four reportable segments: Established Pharmaceutical Products, Nutritional Products, Diagnostic Products, and Vascular Products. Approximately 70% of 2016 net sales were generated outside the United States.
The filing presents Abbott on a standalone basis before the January 4, 2017 acquisition of St. Jude Medical. Fourth-quarter 2016 net sales were $5.333 billion and earnings from continuing operations were $875 million.
Financial performance and liquidity
| Metric | 2016 | 2015 | Change |
|---|---|---|---|
| Net sales | $20.853 billion | $20.405 billion | 2.2% |
| Operating earnings | $3.185 billion | $2.867 billion | 11.1% |
| Earnings from continuing operations | $1.063 billion | $2.606 billion | (59.2%) |
| Net earnings | $1.400 billion | $4.423 billion | (68.4%) |
| Diluted EPS from continuing operations | $0.71 | $1.72 | (58.7%) |
| Diluted EPS | $0.94 | $2.92 | (67.8%) |
| Gross margin | 54.1% | 54.2% | (0.1) percentage point |
| Operating margin | 15.3% | 14.0% | 1.3 percentage points |
| Cash from operating activities | $3.203 billion | $2.966 billion | 8.0% |
| Capital expenditures | $1.121 billion | $1.110 billion | 1.0% |
| Cash and cash equivalents | $18.620 billion | $5.001 billion | Increase of $13.619 billion |
| Total debt | $22.006 billion | $8.998 billion | Increase of approximately $13.0 billion |
| Total assets | $52.666 billion | $41.247 billion | 27.7% |
Net cash from operations exceeded capital expenditures and dividends paid. Working capital increased to $20.1 billion, primarily because of debt-funded cash accumulation before the St. Jude Medical transaction. Abbott had $5.0 billion of unused credit lines expiring in 2019. The company declared $1.045 per share of dividends in 2016, up from $0.98 in 2015, and paid $1.539 billion in dividends.
Research and development expense was $1.422 billion, or approximately 6.8% of sales. Management expected 2017 research and development spending to approximate 7.5% of total sales.
Material changes versus the prior comparable period
- Sales increased 2.2%, driven by volume growth of 5.9%, partly offset by unfavorable foreign exchange of 2.6% and price declines of 1.1%.
- Established Pharmaceutical Products sales increased 3.7% as reported and 10.5% excluding foreign exchange, led by growth in key emerging markets.
- Diagnostic Products sales increased 3.6% as reported and 5.5% excluding foreign exchange. Abbott began launching the Alinity diagnostic platform in Europe.
- Nutritional Products sales declined 1.1% as reported but increased 1.2% excluding foreign exchange. Chinese pediatric nutrition remained difficult because of oversupply and new food-safety registration requirements.
- Vascular Products sales increased 3.7% as reported and 4.5% excluding foreign exchange, supported by MitraClip and endovascular products, but constrained by drug-eluting-stent pricing and market-share pressure.
- Operating margin improved despite currency pressure, supported by efficiency initiatives in the nutrition and diagnostics businesses. Nutrition operating margin rose to 24.1% from 21.0% in 2014, while diagnostics rose to 24.8% from 22.9%.
- Continuing-operations earnings declined substantially because of a $947 million other-than-temporary adjustment to Abbott's Mylan investment, a $480 million Venezuela currency loss, higher interest expense, and other acquisition-related costs. The prior-year comparison also benefited from a $1.752 billion after-tax gain on discontinued operations.
- Net cash from operating activities increased by $237 million, reflecting improved working-capital management. Financing cash flow was $11.147 billion, principally from debt issuance.
Guidance, outlook, risks, contingencies, and unusual items
- Abbott completed the approximately $23.6 billion St. Jude Medical acquisition on January 4, 2017, funded with approximately $13.6 billion of cash and $10 billion of Abbott shares. Approximately $5.8 billion of St. Jude debt was assumed or refinanced. The acquisition was not included in 2016 reported results.
- Management's 2017 priorities included integrating St. Jude Medical, expanding cardiovascular and neuromodulation products, launching Alinity across additional geographies, growing emerging-market pharmaceuticals and nutrition, and continuing margin initiatives. The filing does not provide a clear consolidated 2017 revenue or earnings guidance figure.
- Abbott agreed to sell its Abbott Medical Optics vision-care business to Johnson & Johnson for $4.325 billion in cash, subject to customary adjustments and regulatory approvals. The transaction was expected to close in the first quarter of 2017; AMO remained in continuing operations and had $30 million of 2016 pretax earnings.
- Abbott sought to terminate its $56-per-share Alere acquisition agreement through Delaware litigation after citing investigations, delayed filings, material weaknesses, a product recall, and loss of Medicare billing privileges. The outcome and timing were uncertain.
- Debt increased materially in anticipation of the St. Jude transaction. Long-term debt ratings were reduced from A+/A2 at December 31, 2016 to BBB/Baa3 after closing. Abbott also borrowed $2.0 billion under a bridge facility on January 4, 2017, of which $1.2 billion had been repaid by January 31, 2017.
- Foreign exchange was a significant risk. Abbott recorded a $480 million Venezuela remeasurement loss and a $410 million reduction in cash related to Venezuela currency effects. International sales, emerging-market conditions, currency controls, and government reimbursement pressures remain important exposures.
- Sales rebates and allowances are material: rebates and chargebacks were approximately $2.5 billion in 2016, and a one-percentage-point increase in rebates as a percentage of related gross sales would reduce net sales by approximately $107 million.
- Legal and environmental exposures were estimated at $35 million to $45 million, with approximately $40 million accrued. Separate investigations involved sales and marketing of biliary and coronary stent products. Management did not expect these matters to have a material adverse effect, but outcomes are uncertain.
- Abbott reported no goodwill impairment in 2016. Goodwill was $7.683 billion and net intangible assets were $4.539 billion at year-end, excluding amounts classified as held for disposition.
- Ernst & Young issued unqualified opinions on the financial statements and internal control over financial reporting. Management concluded that disclosure controls and internal controls were effective.
Most important facts for investors to verify
- Post-acquisition leverage, interest expense, credit ratings, refinancing needs, and the pace of debt repayment following the St. Jude Medical acquisition.
- Actual integration costs, revenue contribution, margin performance, and amortization or inventory-step-up effects from St. Jude Medical.
- Completion and cash proceeds from the AMO sale, including purchase-price adjustments and the treatment of related assets and liabilities.
- Resolution of the Alere litigation and any termination fees, settlement costs, or acquisition-related financing consequences.
- Underlying organic sales and margin trends after separating foreign exchange, Venezuela effects, Mylan valuation changes, rebates, restructuring, and other unusual items.
- Execution of the Alinity diagnostic launches and regulatory progress for FreeStyle Libre, MitraClip, Portico, and other pipeline products.
- Exposure to pricing and reimbursement pressure, regulatory actions, product recalls, patent challenges, cybersecurity incidents, and international currency or sovereign-credit risks.