Abbott Laboratories 2014 Form 10-K Summary
Business context and reporting period
Abbott Laboratories reported results for the fiscal year ended December 31, 2014. The company develops, manufactures, and sells health care products through four reportable segments: Established Pharmaceutical Products, Nutritional Products, Diagnostic Products, and Vascular Products. Approximately 70% of sales were generated outside the United States, and emerging markets represented nearly 50% of total sales.
The 2014 comparison reflects continuing operations after the 2013 separation of AbbVie. Developed-markets branded generics and animal health were classified as discontinued operations and were subsequently sold in February 2015.
Key financial metrics
| Metric | 2014 | 2013 | Change |
|---|---|---|---|
| Net sales | $20.247 billion | $19.657 billion | 3.0% increase |
| Operating earnings | $2.599 billion | $2.133 billion | 21.9% increase |
| Earnings from continuing operations | $1.721 billion | $1.988 billion | 13.4% decrease |
| Net earnings | $2.284 billion | $2.576 billion | 11.3% decrease |
| Diluted EPS from continuing operations | $1.12 | $1.26 | Decrease |
| Diluted EPS | $1.49 | $1.62 | Decrease |
| Gross margin | 51.7% | 50.2% | 150 basis-point increase |
| Net cash from operating activities | $3.675 billion | $3.324 billion | Increase |
| Capital expenditures | $1.077 billion | $1.145 billion | Decrease |
| Cash and cash equivalents | $4.063 billion | $3.475 billion | Increase |
| Working capital | $4.7 billion | $9.7 billion | Decrease |
| Long-term debt, including current portion | $3.463 billion | $3.397 billion | Increase |
| Short-term borrowings | $4.382 billion | $3.164 billion | Increase |
Including short-term borrowings, total debt was approximately $7.8 billion at year-end. Abbott had $5.0 billion of unused credit lines supporting commercial paper arrangements. Long-term debt ratings were A+ from Standard & Poor's and A1 from Moody's.
Operating cash flow increased primarily because of improved operating results and lower pension contributions. Investing cash flow included $3.317 billion for acquisitions and $1.077 billion for capital expenditures. Financing cash outflows included $2.195 billion of share repurchases and $1.342 billion of dividends paid.
Segment performance and material changes
| Segment | 2014 sales | 2014 operating earnings | Key development |
|---|---|---|---|
| Established Pharmaceuticals | $3.118 billion | $624 million | Sales increased 14.9% excluding foreign exchange; growth benefited from CFR Pharmaceuticals. |
| Nutritional Products | $6.953 billion | $1.459 billion | Sales increased 5.0% excluding foreign exchange; margins improved to 21.0%. |
| Diagnostic Products | $4.721 billion | $1.079 billion | Sales increased 6.4% excluding foreign exchange; operating margin reached 22.9%. |
| Vascular Products | $2.986 billion | $1.091 billion | Sales were essentially flat excluding foreign exchange; pricing pressure affected coronary products. |
- Abbott acquired approximately 99.9% of CFR Pharmaceuticals for approximately $2.9 billion in cash, assuming approximately $570 million of debt. CFR expanded Abbott's branded-generics presence in Latin America.
- Abbott acquired control of Russian pharmaceutical company Veropharm for approximately $315 million excluding assumed debt, and acquired Topera for approximately $250 million plus potential milestone payments of up to $300 million.
- Abbott announced the sale of its developed-markets branded generics business to Mylan and its animal health business to Zoetis. Both transactions closed in February 2015.
- Abbott repurchased 54.6 million shares for approximately $2.1 billion during 2014. The board authorized an additional $3.0 billion repurchase program in September 2014, in addition to $512 million remaining under the prior program.
- Quarterly dividends increased from $0.22 to $0.24 per share beginning with the dividend paid in February 2015. Dividends declared increased 40%, to $0.90 per share for 2014.
Margins, taxes, and unusual items
Operating margin expanded by approximately 200 basis points in 2014. Gross margin improved primarily in Nutritionals, Diagnostics, and Vascular Products. Research and development expense declined 1.9% to $1.345 billion, while selling, general and administrative expense increased 2.5%.
Abbott recorded approximately $203 million of 2014 restructuring and related charges, including $164 million of severance and other charges and approximately $39 million of additional charges, primarily accelerated depreciation. The company also incurred an $18.3 million charge for extinguishing approximately $500 million of debt assumed with CFR.
The effective tax rate on continuing operations was 31.6%, compared with 2.6% in 2013. The 2014 tax provision included approximately $440 million of expense from a one-time repatriation of non-U.S. earnings, partially offset by $125 million of benefits from resolving prior-year tax positions. Discontinued operations included $166 million of net tax benefits primarily related to AbbVie tax matters.
Guidance, outlook, risks, and contingencies
Management did not provide a specific consolidated earnings or sales forecast in the filing. For 2015, Abbott planned to expand emerging-market pharmaceuticals, develop next-generation diagnostics, improve nutrition margins, grow MitraClip and ABSORB, and invest in diabetes, medical optics, and other differentiated technologies. Abbott expected research and development spending to remain approximately 6% to 7% of sales annually.
- Foreign exchange was a significant headwind: the stronger U.S. dollar reduced reported sales and earnings, and 2014 comprehensive income was a loss of $757 million, including a $2.206 billion foreign-currency translation loss.
- Key business risks include health care price controls and reimbursement reductions, regulatory approval and compliance requirements, product liability and recalls, intellectual-property disputes, manufacturing and supply interruptions, cyber risks, economic and sovereign-credit weakness, and foreign currency volatility.
- Abbott reported approximately $80 million accrued for legal proceedings and environmental exposures, with an estimated possible loss range of approximately $70 million to $85 million. Management did not expect the ultimate resolution of disclosed proceedings to materially affect financial position, cash flows, or results of operations.
- Patent and license expirations were not expected to have a significant effect over the next three years, but competition and rapid technological change remain material risks.
- Pension and post-employment obligations were significant. Abbott contributed $393 million to defined benefit pension plans in 2014 and expected approximately $585 million of pension contributions in 2015.
- Abbott had approximately $1.3 billion of gross unrecognized tax benefits and believed that $525 million to $635 million could decrease within the following twelve months as tax matters were resolved.
- Venezuela represented approximately 2% of sales, with approximately $240 million of net monetary assets exposed to potential currency devaluation and exchange-rate restrictions.
Most important facts for investors to verify
- Whether reported sales and margin growth can continue after adjusting for acquisitions, discontinued operations, foreign exchange, and restructuring charges.
- The earnings and cash-flow contribution of CFR, Veropharm, and Topera, including final purchase-price allocations and contingent consideration.
- The financial and strategic effects of the Mylan and Zoetis transactions, including the value and volatility of Abbott's Mylan equity investment.
- Liquidity after acquisitions, share repurchases, dividends, pension contributions, and increased short-term borrowings.
- The sustainability of rebate estimates, particularly because rebates and chargebacks were approximately $2.1 billion in 2014 and a one-percentage-point increase in rebate rates would reduce net sales by approximately $107 million.
- Progress in vascular products, including U.S. drug-eluting-stent share, MitraClip growth, ABSORB regulatory approvals, and pricing pressure.
- Potential impacts from litigation, regulatory investigations involving stent sales and marketing, tax audits, pension deficits, currency exposure, and the Medical Optics goodwill impairment risk.