Abbott Laboratories 2012 Form 10-K Summary
Business context and reporting period
Abbott Laboratories filed its annual report for the fiscal year ended December 31, 2012. The company developed, manufactured, and sold diversified healthcare products through five reportable segments: Proprietary Pharmaceuticals, Established Pharmaceuticals, Nutritional Products, Diagnostic Products, and Vascular Products. The filing reflects Abbott before the January 1, 2013 separation of its research-based pharmaceutical business into AbbVie Inc.; historical pharmaceutical results will be presented as discontinued operations beginning in 2013.
Key financial metrics
| Metric | 2012 | 2011 |
|---|---|---|
| Net sales | $39.874 billion | $38.851 billion |
| Net earnings | $5.963 billion | $4.728 billion |
| Diluted earnings per share | $3.72 | $3.01 |
| Operating earnings | $8.085 billion | $5.752 billion |
| Gross margin | 62.1% | 60.0% |
| Cash flow from operations | $9.314 billion | $8.970 billion |
| Capital expenditures | $1.795 billion | $1.492 billion |
| Cash and cash equivalents | $10.802 billion | $6.813 billion |
| Total assets | $67.235 billion | $60.277 billion |
| Long-term debt | $18.085 billion | $12.040 billion |
| Working capital | $18.0 billion | $8.3 billion |
2012 net sales increased 2.6%, consisting of 1.7% price growth, 3.8% volume growth, and a 2.9% unfavorable foreign-exchange effect. The effective tax rate was 4.8%, compared with 9.0% in 2011, reflecting tax benefits from prior-year tax positions and the tax treatment of the debt extinguishment loss.
Segment sales and operating earnings were: Proprietary Pharmaceuticals sales of $18.012 billion and operating earnings of $7.948 billion; Established Pharmaceuticals sales of $5.121 billion and operating earnings of $1.237 billion; Nutritionals sales of $6.471 billion and operating earnings of $1.019 billion; Diagnostics sales of $4.292 billion and operating earnings of $804 million; and Vascular sales of $3.071 billion and operating earnings of $902 million.
Material changes versus the prior comparable period
- Net earnings increased 26.1% and diluted EPS increased 23.6%, despite significant separation, litigation, and debt-extinguishment items.
- Gross margin improved by 210 basis points, driven by cost reductions, favorable product mix, exchange effects, and margin improvements across reportable segments.
- HUMIRA worldwide sales increased to $9.3 billion from $7.9 billion. Generic competition for TriCor began in the fourth quarter of 2012, contributing to lower fenofibrate sales.
- Vascular sales declined 7.9%, partly because royalty and supply agreements involving third-party products, including Promus, were wound down. Excluding those agreements and foreign exchange, Vascular sales increased 3.4%.
- Abbott recorded $1.35 billion of net loss on the early extinguishment of $7.7 billion of long-term debt in the fourth quarter.
- Abbott recorded approximately $100 million of additional Depakote-related litigation expense in 2012 and paid approximately $1.6 billion to resolve related claims, compared with a $1.5 billion charge recorded in 2011.
- Research and development expense increased to $4.322 billion from $4.129 billion. Selling, general and administrative expense declined 5.5%, partly due to the prior-year Depakote charge.
- Abbott repurchased approximately 37.0 million shares for approximately $2.2 billion in 2012 and declared total dividends of $1.67 per share, including a reduced fourth-quarter dividend of $0.14 per share following the planned separation.
Cash flow, debt, liquidity, and balance-sheet considerations
Operating cash flow was $9.314 billion and exceeded capital expenditures and cash dividends. Cash and cash equivalents increased to $10.802 billion, while current assets increased to $31.323 billion. Cash flow from investing activities was an outflow of $6.081 billion, primarily reflecting purchases of investment securities and capital expenditures. Financing activities provided $716 million, including debt issuance and repayments, share repurchases, and dividends.
Reported year-end debt includes $14.7 billion of long-term notes issued by AbbVie Inc. in 2012 and guaranteed by Abbott before separation. Abbott stated that it had no remaining obligations related to this $15.7 billion of AbbVie debt after the January 1, 2013 separation. After separation, Abbott expected principal payments of $309 million in 2013 and approximately $3.3 billion in 2019 and thereafter. Abbott's reported credit ratings were A+ from Standard & Poor's and A1 from Moody's.
Guidance, outlook, commentary, risks, and unusual items
- Management expected 2013 priorities to include nutrition product launches and margin improvement, expansion of established pharmaceuticals in emerging markets, next-generation diagnostics, continued development of Xience, MitraClip, and Absorb, and growth in medical optics, diabetes care, and other differentiated technologies.
- Following the separation, Abbott expected approximately 70% of sales to be generated outside the United States, increasing exposure to currency movements, foreign regulation, reimbursement policies, political and economic conditions, and sovereign-credit risks.
- Abbott expected research and development spending after separation to be approximately 6% to 7% of sales annually. The filing states that no individual development project was expected to be material to cash flows or results of operations over the next five years, although aggregate development costs were expected to be material.
- Abbott expected an approximately $100 million tax benefit in the first quarter of 2013 from legislation extending certain tax provisions. Excluding discrete items, management expected an annual effective tax rate of approximately 21%.
- Beginning in 2013, Abbott would no longer sell U.S. pharmaceutical products and would no longer incur certain U.S. pharmaceutical fees, rebates, and discounts, but would become subject to the 2.3% U.S. medical-device excise tax.
- Key risks include pricing and reimbursement pressure, generic and technological competition, patent challenges and expirations, product safety or recall events, regulatory compliance, manufacturing disruptions, litigation, pension and post-employment obligations, foreign exchange, European government receivables, cybersecurity, and separation-related indemnification and tax risks.
- Legal and environmental exposures were estimated at $70 million to $100 million, with approximately $80 million accrued at December 31, 2012. Management believed the ultimate resolution of disclosed proceedings would not materially affect financial position, cash flows, or results of operations, although outcomes remained uncertain.
- The filing reports an unqualified audit opinion and an unqualified opinion on internal control over financial reporting. Deloitte & Touche was scheduled to be replaced by Ernst & Young beginning with the fiscal year ending December 31, 2014.
Most important facts for an investor to verify
- Reconcile post-separation Abbott results with the removal of the Proprietary Pharmaceuticals business and confirm the treatment of AbbVie as discontinued operations.
- Verify the amount and maturity profile of debt retained by Abbott after separation, excluding debt issued by AbbVie.
- Assess the sustainability of 2012 earnings growth after excluding the debt-extinguishment charge, Depakote-related items, tax benefits, separation costs, restructuring charges, and other unusual items.
- Monitor HUMIRA and other product exposure to generic competition, patent litigation, pricing pressure, and reimbursement changes.
- Evaluate liquidity and working-capital exposure to government receivables in Italy, Spain, Portugal, and Greece, including the percentages past due.
- Review pension funding requirements, accumulated actuarial losses, goodwill and intangible-asset balances, and potential impairment risk, particularly in Medical Optics.
- Confirm the scope of remaining litigation, contingent milestone payments, tax contingencies, and separation-related indemnification obligations.