Abbott Laboratories 2013 Form 10-K Summary
Business context and reporting period
Abbott Laboratories filed its Form 10-K for the fiscal year ended December 31, 2013. Abbott is a diversified healthcare company operating primarily through Established Pharmaceutical Products, Nutritional Products, Diagnostic Products, and Vascular Products, with additional Diabetes Care and Medical Optics businesses. Approximately 70% of net sales were generated outside the United States.
On January 1, 2013, Abbott completed the separation of its research-based pharmaceutical business into AbbVie Inc. Historical AbbVie results are presented as discontinued operations, making continuing-operations comparisons with 2012 particularly important.
Financial results and key metrics
| Metric | 2013 | 2012 |
|---|---|---|
| Net sales | $21.848 billion | $21.494 billion |
| Operating earnings | $2.629 billion | $1.894 billion |
| Earnings from continuing operations | $2.383 billion | $579 million |
| Net earnings | $2.576 billion | $5.963 billion |
| Diluted EPS from continuing operations | $1.50 | $0.36 |
| Diluted EPS | $1.62 | $3.72 |
| Net cash from operating activities | $3.324 billion | $9.314 billion |
| Capital expenditures | $1.145 billion | $1.795 billion |
| Cash and cash equivalents | $3.475 billion | $10.802 billion |
| Long-term debt, including current portion | $3.397 billion | $18.394 billion |
Net sales increased 1.6% year over year, including a 4.5% volume contribution, offset by a 2.1% unfavorable foreign-exchange effect and a 0.8% price decline. Gross margin was 50.4%, compared with 50.6% in 2012. Operating margin was approximately 12.0%, compared with 8.8% in 2012. The continuing-operations earnings margin was approximately 10.9%.
- Nutritional Products sales were $6.740 billion, up from $6.461 billion; operating earnings increased to $1.263 billion from $1.020 billion.
- Diagnostic Products sales were $4.545 billion, up from $4.292 billion; operating earnings increased to $1.008 billion from $825 million.
- Established Pharmaceutical Products sales were $4.974 billion, down from $5.121 billion; operating earnings declined to $1.182 billion from $1.237 billion.
- Vascular Products sales were $3.012 billion, down from $3.071 billion; operating earnings declined to $962 million from $1.020 billion.
Fourth-quarter 2013 continuing-operations sales were $5.655 billion and earnings from continuing operations were $589 million, compared with a continuing-operations loss of $522 million in the fourth quarter of 2012. The 2012 quarter included significant debt-extinguishment effects.
Cash flow, liquidity, debt, and capital allocation
- Operating cash flow declined primarily because AbbVie received approximately $5.9 billion of cash at separation, Abbott incurred approximately $435 million of separation-related cash outflows, and contributed $724 million to defined benefit pension plans.
- Working capital was $9.7 billion at year-end 2013, versus $18.0 billion at year-end 2012, largely reflecting the transfer of approximately $9 billion of working capital to AbbVie.
- Total short- and long-term debt was approximately $6.6 billion at December 31, 2013, including $3.164 billion of short-term borrowings and $3.397 billion of long-term debt including current maturities.
- Abbott had $5.0 billion of unused credit lines supporting commercial paper arrangements through 2017. Debt ratings were A+ from Standard & Poor’s and A1 from Moody’s.
- Abbott repurchased approximately $1.6 billion of common shares in 2013 and planned to purchase more than $2 billion of additional shares during 2014.
- Abbott declared $0.64 per share of dividends in 2013 and increased its quarterly dividend 57% to $0.22 per share, effective with the February 2014 payment.
Material changes versus the prior comparable period
- The AbbVie separation materially reduced Abbott’s reported assets, debt, cash, working capital, operating cash flow, and total net earnings. Prior-period sales and continuing-operations results were adjusted to exclude the former proprietary pharmaceuticals business, but balance-sheet and cash-flow comparisons remain substantially affected by the separation.
- Continuing-operations earnings increased sharply because 2012 included a $1.35 billion loss on the early extinguishment of debt and higher separation-related and restructuring costs.
- Research and development expense declined 6.0% to $1.452 billion, primarily because restructuring and asset-impairment charges incurred in 2012 did not recur.
- Selling, general and administrative expense declined 6.8%, reflecting transferred corporate costs, transition-service billings, cost management, and lower restructuring costs.
- Abbott acquired IDEV Technologies for $310 million and OptiMedica for $260 million in cash, with additional contingent consideration of up to $150 million for OptiMedica.
- Restructuring charges were approximately $93 million in 2013, compared with approximately $189 million in 2012 for the continuing businesses.
Guidance, outlook, risks, contingencies, and unusual items
Management’s 2014 priorities included expanding nutrition and established-pharmaceutical offerings in emerging markets, improving margins in nutrition and diagnostics, expanding the Xience, MitraClip, and Absorb vascular franchises, and developing new diagnostic, diabetes-care, and medical-optics products. Abbott expected the 2013 pediatric nutrition recall to continue negatively affecting international pediatric nutrition sales through the first half of 2014.
Abbott expected to repatriate approximately $2 billion of foreign earnings in 2014. The company projected additional 2014 tax expense of approximately $550 million to $600 million from the repatriation, cash taxes of no more than $150 million after use of deferred tax assets, and an annual effective tax rate of approximately 19% excluding the repatriation tax effect.
- Major risks include healthcare pricing and reimbursement pressure, government cost-containment programs, regulatory approval and compliance requirements, product safety or recall events, manufacturing and supply disruptions, patent and intellectual-property disputes, foreign-exchange exposure, international economic and political risks, cyber threats, and litigation.
- Sales rebates and allowances were approximately $2.0 billion in 2013. A one-percentage-point increase in the rebate rate on related gross sales would reduce net sales by approximately $125 million.
- Legal and environmental exposures were estimated at $70 million to $90 million, with approximately $80 million accrued at year-end. Management did not expect their ultimate resolution to materially affect financial position, cash flows, or results of operations.
- Abbott recorded no goodwill impairment in 2013. Management identified Medical Optics as comparatively more sensitive to reimbursement pressure, regulatory delays, integration risk, and foreign-currency movements.
- Unrecognized tax benefits totaled approximately $1.965 billion at year-end, of which approximately $1.7 billion could affect the effective tax rate if recognized. Abbott expected a possible reduction of $350 million to $425 million within the following twelve months.
- The filing states that Abbott’s financial statements and internal control over financial reporting received unqualified audit opinions.
Most important facts for investors to verify
- Assess continuing-operations performance separately from the substantial effects of the AbbVie separation.
- Reconcile the sharp decline in cash and working capital with the $5.9 billion cash transfer and other separation-related flows.
- Monitor international pediatric nutrition recovery after the 2013 supplier recall.
- Evaluate whether volume growth in nutrition and diagnostics offsets pricing, reimbursement, and foreign-exchange pressure in pharmaceuticals and vascular products.
- Review the timing and tax impact of the planned foreign-earnings repatriation.
- Track debt maturities, commercial paper usage, share repurchases, pension funding, and the company’s ability to sustain dividends while maintaining liquidity.
- Review regulatory, product-liability, intellectual-property, tax, and contingent-liability disclosures, including matters allocated between Abbott and AbbVie.