Abbott Laboratories 2015 Form 10-K Summary
Business context and reporting period
Abbott Laboratories filed its annual report for the fiscal year ended December 31, 2015. 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 net sales were generated outside the United States.
The filing presents fourth-quarter information but is principally an annual filing. Fourth-quarter 2015 continuing-operations net sales were $5.188 billion and earnings from continuing operations were $695 million.
Key financial metrics
| Metric | 2015 | 2014 | Change |
|---|---|---|---|
| Net sales | $20.405 billion | $20.247 billion | 0.8% increase |
| Operating earnings | $2.867 billion | $2.599 billion | 10.3% increase |
| Earnings from continuing operations | $2.606 billion | $1.721 billion | 51.4% increase |
| Net earnings | $4.423 billion | $2.284 billion | 93.8% increase |
| Diluted EPS from continuing operations | $1.72 | $1.12 | Increase |
| Diluted EPS | $2.92 | $1.49 | Increase |
| Gross margin | 54.2% | 51.7% | 250 basis-point expansion |
| Effective tax rate on continuing operations | 18.1% | 31.6% | Lower rate |
| Net cash from operating activities | $2.966 billion | $3.675 billion | Decrease |
| Capital expenditures | $1.110 billion | $1.077 billion | Increase |
| Cash and cash equivalents | $5.001 billion | $4.063 billion | Increase |
Net earnings benefited materially from discontinued operations, including a $1.752 billion after-tax gain from the sale of the developed-markets branded generics and animal-health businesses. Continuing-operations results are therefore more representative of ongoing performance.
Segment performance and material changes
- Established Pharmaceuticals: Sales were $3.720 billion, up from $3.118 billion. Excluding foreign exchange, continuing-operations sales increased 34.1%, including contributions from the CFR Pharmaceuticals and Veropharm acquisitions.
- Nutritional Products: Sales were $6.975 billion versus $6.953 billion. Excluding foreign exchange, sales increased 5.5%; operating margin increased to 25.0% from 18.7% in 2013.
- Diagnostics: Sales were $4.646 billion versus $4.721 billion. Excluding foreign exchange, sales increased 7.3%; operating margin reached 25.2%, up from 22.2% in 2013.
- Vascular Products: Sales were $2.792 billion versus $2.986 billion. Excluding foreign exchange, sales increased 1.3%, while pricing pressure on drug-eluting stents continued to weigh on reported sales.
- Abbott completed the sale of its developed-markets branded generics business to Mylan in February 2015 and sold 40.25 million Mylan shares in April 2015 for $2.29 billion of proceeds, retaining approximately 69.75 million shares.
- Abbott acquired the remaining interest in Tendyne Holdings for approximately $225 million in cash, plus up to $150 million of potential milestone payments.
- Abbott repurchased approximately 47.5 million shares in 2015 for approximately $2.2 billion and declared dividends of $0.98 per share, up from $0.90 per share in 2014.
Debt, liquidity, cash flow, and balance sheet
- Total short- and long-term debt was approximately $9.0 billion at December 31, 2015, including $3.127 billion of short-term borrowings and $5.874 billion of long-term debt, compared with $7.830 billion at year-end 2014.
- Abbott issued $2.5 billion of long-term debt in March 2015 and entered into interest-rate swaps covering the issuance. Unused credit lines of approximately $5.0 billion supported commercial paper arrangements through 2019.
- Working capital increased to $5.0 billion from $3.1 billion. Cash and investments totaled approximately $10.2 billion.
- Operating cash flow declined primarily because of the divestiture of the developed-markets pharmaceutical business and higher pension contributions. Abbott contributed $579 million to defined benefit pension plans and expects approximately $576 million of contributions in 2016.
- Contractual obligations totaled approximately $12.681 billion, including $5.814 billion of long-term debt, $3.077 billion of interest obligations, $1.919 billion of purchase commitments, and $638 million of operating lease obligations.
Guidance, outlook, risks, contingencies, and unusual items
- Management planned to focus in 2016 on expanding nutrition and established-pharmaceutical portfolios, increasing emerging-market penetration, improving diagnostics margins, advancing MitraClip and Absorb, and developing next-generation diagnostic, diabetes-care, and medical-optics technologies.
- On January 30, 2016, Abbott agreed to acquire Alere for $56 per share, with an expected equity value of approximately $5.8 billion and assumption or refinancing of approximately $2.6 billion of Alere net debt. The transaction remained subject to shareholder and regulatory approvals. Abbott obtained a commitment for a bridge facility of up to $9 billion.
- Abbott stated that its credit ratings were under review because of the expected additional borrowing for the Alere transaction.
- Foreign exchange was a major headwind: reported international sales were reduced by currency translation, while emerging-market sales increased 17.1% excluding foreign exchange.
- Abbott’s Venezuela operations represented approximately 2% of consolidated sales. A February 2016 change in the official exchange rate could produce an estimated foreign-exchange loss of approximately $165 million in the first quarter of 2016, based on year-end monetary assets.
- Abbott held approximately $3.8 billion of available-for-sale equity securities, principally Mylan shares. A hypothetical 20% decline in these investments would reduce fair value by approximately $750 million.
- Sales rebates and allowances were significant: rebates and chargebacks were approximately $2.2 billion in 2015. A one-percentage-point increase in rebates as a percentage of related gross sales would reduce net sales by approximately $101 million.
- Goodwill was $9.638 billion and net intangible assets were $5.562 billion. Medical Optics goodwill had only an approximately 15% excess of estimated fair value over carrying value, creating impairment sensitivity to lower growth, regulatory delays, foreign exchange, or higher discount rates.
- Legal and environmental exposures were estimated at $35 million to $50 million, with approximately $45 million accrued. Management did not expect these matters to have a material adverse effect, although investigations included government inquiries into marketing of biliary and coronary stents.
- Restructuring and cost-reduction charges were approximately $310 million in 2015, including $95 million of employee-related severance and other charges and approximately $45 million of accelerated depreciation.
- The filing disclosed no material weaknesses in internal control; management and the independent auditors concluded that internal control over financial reporting was effective.
Most important facts for investors to verify
- Separate recurring continuing-operations performance from the $1.752 billion after-tax gain on divestitures and other discontinued-operation effects.
- Assess the financing, leverage, interest expense, credit-rating impact, and regulatory status of the proposed Alere acquisition.
- Monitor foreign-exchange exposure, particularly Venezuela and the broader international sales base.
- Evaluate the valuation risk associated with Abbott’s Mylan investment and Medical Optics goodwill.
- Review the sustainability of margin expansion, especially in Nutritionals, Diagnostics, and Vascular, against pricing pressure and rebate assumptions.
- Verify pension funding requirements, contractual obligations, tax contingencies, and the potential resolution of disclosed legal investigations.