Abbott Laboratories 2015 Annual Report Download - page 64

FINANCIAL REVIEW
ABBOTT 2015 ANNUAL REPORT
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provides rebates to state agencies that administer the Special
Supplemental Nutrition Program for Women, Infants, and Children
(WIC), wholesalers, group purchasing organizations, and other
government agencies and private entities. Rebate amounts are
usually based upon the volume of purchases using contractual or
statutory prices for a product. Factors used inthe rebate calcula-
tions include the identification of which products have been sold
subject to a rebate, which customer or government agency price
terms apply, and the estimated lag time between sale and payment
of a rebate. Using historical trends, adjusted for current changes,
Abbott estimates the amount of the rebate that will be paid, and
records the liability as a reduction of gross sales when Abbott
records its sale of the product. Settlement of the rebate generally
occurs from one to sixmonths after sale. Abbott regularly analyzes
the historical rebate trends and makes adjustments to reserves
forchanges in trends and terms of rebate programs. Rebates and
chargebacks charged against gross sales in 2015, 2014 and 2013
amounted to approximately $2.2billion, $2.1billion and $1.9bil-
lion, respectively, or 21.6percent, 20.1percent and 19.1percent,
respectively, based on gross sales of approximately $10.3billion,
$10.3billion and $10.2billion, respectively, subject to rebate. A
one-percentage point increase in the percentage of rebates to
related gross sales would decrease net sales by approximately
$101million in 2015. Abbott considers a one-percentage point
increase to be a reasonably likely increase in the percentage of
rebates to related gross sales. Other allowances charged against
gross sales were approximately $124million, $138million and
$146million for cash discounts in 2015, 2014 and 2013, respectively,
and $238million, $210million and $208million for returns in 2015,
2014 and 2013, respectively. Cash discounts are known within 15 to
30days of sale, and therefore can be reliably estimated. Returns can
be reliably estimated because Abbott’s historical returns are low,
and because sales returns terms and other sales terms have
remained relatively unchanged for several periods.
Management analyzes the adequacy of ending rebate accrual
balances each quarter. In the domestic nutritional business, man-
agement uses both internal and external data available to estimate
the level of inventory in the distribution channel. Management has
access to several large customers’ inventory management data, and
for other customers, utilizes data from a third party that measures
time on the retail shelf. These sources allow management to make
reliable estimates of inventory in the distribution channel. Except
for a transition period before or after a change in the supplier for
the WIC business in a state, inventory in the distribution channel
does not vary substantially. Management also estimates the states’
processing lag time based on claims data. In addition, internal
processing time is a factor in estimating the accrual. In the WIC
business, the state where the sale is made, which is the determin-
ing factor for the applicable price, is reliably determinable.
Estimates are required for the amount of WIC sales within each
state where Abbott has the WIC business. External data sources
utilized for that estimate are participant data from the U.S.
Department of Agriculture (USDA), which administers the WIC
program, participant data from some of the states, and internally
administered market research. The USDA has been making its
data available for many years. Internal data includes historical
redemption rates and pricing data. At December31, 2015, Abbott
had WIC business in 26 states.
net debt, currently $2.6billion, will be assumed or refinanced by
Abbott. InFebruary 2016, Abbott obtained a commitment for a
364-day senior unsecured bridge term loan facility for an amount
not to exceed $9billion in conjunction with its pending acquisi-
tion of Alere. While Abbott plans to use cash on hand at the time
of the acquisition from anticipated long-term borrowings to
acquire Alere, the bridge facility will provide back-up financing.
Abbott’s short- and long-term debt totaled $9.0billion at
December31, 2015. At December31, 2015, Abbott’s long-term
debtrating was A+ by Standard and Poor’s Corporation and A2 by
Moody’s Investors Service. As a result of the pending acquisition
of Alere, Abbott’s credit ratings are under review and it is antici-
pated that the ratings will be adjusted to reflect the increased
borrowings that will be incurred to finance the acquisition. In
March 2015, Abbott issued $2.5billion of long-term debt consist-
ing of $750million that matures in 2020, $750million in 2022
and$1.0billion in 2025 with fixed interest rates of 2.0 percent,
2.55 percent, and 2.95 percent, respectively. Abbott also entered
into interest rate swap contracts totaling $2.5billion related to
thedebt issuance. These contracts have the eect of changing
Abbott’s obligation from a fixed interest rate to a variable interest
rate obligation. In the fourth quarter of 2014, Abbott extinguished
approximately $500million of long-term debt that was assumed
as part of the acquisition of CFR and incurred a charge of
$18.3million related to the early repayment of this debt.
Abbott declared dividends of $0.98 per share in 2015 compared
to$0.90 per share in 2014, a 9% increase. Dividends paid were
$1.443billion in 2015 compared to $1.342billion in 2014. The year-
over-year change in dividends reflects the impact of the increase
in the dividend rate. In December 2015, Abbott increased the
company’s quarterly dividend to $0.26 per share from $0.24 per
share, eective with the dividend paid in February 2016.
In addition to preparing for the close of the Alere acquisition,
Abbott will focus on several other key initiatives in 2016. In the
nutritional business, Abbott will continue to build its product
portfolio with the introduction of new science-based products,
expand in high-growth emerging markets and implement addi-
tional margin improvement initiatives. In the established
pharmaceuticals business, Abbott will continue to focus on obtain-
ing additional product approvals across numerous countries and
increasing its penetration of emerging markets. In the diagnostics
business, Abbott will focus on the development of next-generation
instrument platforms and other advanced technologies, expansion
in emerging markets, and further improvements in the segment’s
operating margin. In the vascular business, Abbott will continue to
focus on marketing products in the coronary and endovascular
franchises, and increasing MitraClip sales, as well as further clinical
development of Absorb, its bioresorbable vascular scaold (BVS)
device and a further penetration of Absorb in numerous countries.
In Abbott’s other segments, Abbott will focus on developing dier-
entiated technologies in higher growth markets.
CRITICAL ACCOUNTING POLICIES
Sales Rebates—In 2015, approximately 42percent of Abbott’s con-
solidated gross revenues were subject to various forms of rebates
and allowances that Abbott recorded as reductions of revenues at
the time of sale. Most of these rebates and allowances in 2015 are
inthe Nutritional Products and Diabetes Care segments. Abbott