Abbott Laboratories: 2011 Form 10-K Summary
Business context and reporting period
Abbott Laboratories filed its annual report for the fiscal year ended December 31, 2011. The company develops, manufactures, and sells pharmaceutical, nutritional, diagnostic, vascular, diabetes-care, and medical-optics products across five reportable segments: Proprietary Pharmaceuticals, Established Pharmaceuticals, Nutritionals, Diagnostics, and Vascular Products. Approximately 60% of net sales were generated outside the United States.
Abbott announced plans in October 2011 to separate into two publicly traded companies: a diversified medical-products company retaining the Abbott name and a research-based pharmaceutical company. Completion was expected by the end of 2012, subject to approvals and other conditions.
Key financial metrics
| Metric | 2011 | 2010 | Change |
|---|---|---|---|
| Net sales | $38.851 billion | $35.167 billion | 10.5% increase |
| Operating earnings | $5.752 billion | $6.088 billion | 5.5% decrease |
| Net earnings | $4.728 billion | $4.626 billion | 2.2% increase |
| Diluted EPS | $3.01 | $2.96 | 1.7% increase |
| Gross margin | 60.0% | 58.3% | Improved |
| Operating margin | 14.8% | 17.3% | Decreased |
| Net margin | 12.2% | 13.2% | Decreased |
| Cash flow from operations | $8.970 billion | $8.736 billion | 2.7% increase |
| Capital expenditures | $1.492 billion | $1.015 billion | Increase |
| Cash and cash equivalents | $6.813 billion | $3.648 billion | Increase |
| Total debt, including current maturities | $15.415 billion | $16.613 billion | Decrease |
| Total assets | $60.277 billion | $60.574 billion | Slight decrease |
Fourth-quarter 2011 net sales were $10.377 billion, gross profit was $6.540 billion, net earnings were $1.619 billion, and diluted EPS was $1.02. The filing does not provide a separate fourth-quarter cash-flow statement.
Research and development expense was $4.129 billion, or approximately 10.6% of sales, compared with $3.724 billion in 2010. Dividends declared increased to $1.92 per share from $1.76 per share.
Material changes versus the prior comparable period
- Sales increased primarily from continued HUMIRA growth, acquisitions, volume growth, and favorable foreign-exchange translation. International sales increased 14.3%, while U.S. sales increased 5.4%.
- HUMIRA worldwide sales rose to $7.9 billion from $6.5 billion. Abbott forecast low-double-digit worldwide HUMIRA sales growth for 2012.
- Segment sales growth was led by Established Pharmaceuticals, up 19.8%; Proprietary Pharmaceuticals, up 11.0%; Diagnostics, up 8.8%; Nutritionals, up 8.6%; and Vascular Products, up 4.4%.
- Operating earnings declined despite higher sales, primarily because of a $1.5 billion litigation charge related to the Depakote investigation, higher research and development spending, and restructuring and integration costs.
- The effective tax rate declined to 9.0% from 19.0%, benefiting from a $580 million favorable resolution of prior-year tax positions and the tax treatment of the litigation reserve.
- Cash flow benefited from operating performance, the non-cash litigation reserve, and the release of $1.87 billion of restricted funds following a favorable appellate decision in the HUMIRA patent litigation.
- Abbott repaid $2.0 billion of long-term notes during 2011 and ended the year with $6.7 billion of unused credit facilities. No shares were repurchased under the company’s $5 billion authorization during 2011.
Guidance, outlook, risks, contingencies, and unusual items
- Management expected 2012 priorities to include maximizing HUMIRA and AndroGel, expanding established pharmaceuticals in emerging markets, advancing Xience, MitraClip, and ABSORB, and developing differentiated diagnostic, nutrition, diabetes, and medical-optics technologies.
- Generic competition for TriCor was expected to begin in the second half of 2012. Additional patent and exclusivity risks affect Niaspan, AndroGel, Trilipix, and other products in later periods.
- The proposed separation may be delayed, completed on different terms, or not completed. Abbott was evaluating the post-separation capitalization and liquidity structure and expected the new pharmaceutical company to fund a tender for a portion of outstanding debt.
- The Depakote investigation remained unresolved. Abbott recorded a $1.5 billion reserve, and management stated that the ultimate resolution could materially affect cash flows in a reporting period. Total reserves for legal proceedings and environmental exposures were approximately $1.6 billion, with an estimated possible-loss range of $1.59 billion to $1.63 billion.
- Other unusual 2011 items included $672.5 million of acquired in-process and collaboration research and development expense, $194 million of restructuring charges, $174 million of impairment charges for certain research and development assets, and a $137 million charge related to the change in foreign-subsidiary year-end reporting.
- Abbott carried substantial post-employment obligations and reported $3.8 billion of pretax pension actuarial losses and prior-service costs in accumulated other comprehensive income. The defined-benefit and medical plans had combined projected obligations exceeding plan assets by approximately $3.3 billion.
- Key risks include patent expiration and generic competition, regulatory approval and compliance, product liability and safety issues, pricing and reimbursement pressure, foreign-exchange and international sovereign-debt exposure, manufacturing disruptions, litigation, and the execution of the planned separation.
- Governmental receivables in Greece, Portugal, Italy, and Spain totaled $1.73 billion at year-end, with 27% more than one year past due.
Most important facts for investors to verify
- Whether the proposed pharmaceutical spin-off was completed as planned and the resulting allocation of debt, cash, pension obligations, and other liabilities.
- The final cash cost and legal resolution of the Depakote investigation and related state and shareholder litigation.
- HUMIRA growth, expected loss of exclusivity in the United States in December 2016, and the timing and commercial impact of generic competition for TriCor and other products.
- Underlying operating performance excluding the $1.5 billion litigation reserve, restructuring, integration, impairment, and acquired in-process research and development charges.
- Collection trends and allowance adequacy for government receivables in Southern Europe.
- Progress and regulatory outcomes for MitraClip, ABSORB, Xience Xpedition, pharmaceutical pipeline programs, and other key development projects.
- Debt refinancing and liquidity requirements, including approximately $1.0 billion of 2012 long-term debt maturities and expiring credit facilities.
- The sensitivity of revenue to rebates and allowances: rebates and chargebacks were approximately $5.5 billion in 2011, and a one-percentage-point increase in the rebate rate would have reduced net sales by approximately $248 million.