UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
xQUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 20152016
OR
oTRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission File No. 1-2189
ABBOTT LABORATORIES
An Illinois Corporation | I.R.S. Employer Identification No. | |
36-0698440 |
100 Abbott Park Road
Abbott Park, Illinois 60064-6400
Telephone: (224) 667-6100
Indicate by check mark whether the registrant: (l) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of l934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 229.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
Large Accelerated Filer x |
| Accelerated Filer o |
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Non-Accelerated Filer o |
| Smaller reporting company o |
(Do not check if a smaller reporting company) |
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Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No x
As of March 31, 2015,2016, Abbott Laboratories had 1,488,757,3181,469,152,033 common shares without par value outstanding.
Abbott Laboratories
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Item 1. Financial Statements and Supplementary Data |
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6 | ||
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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations | 18 | |
Item 3. Quantitative and Qualitative Disclosures about Market Risk | 24 | |
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24 | ||
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25 | ||
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Item 2. Unregistered Sales of Equity Securities and Use of Proceeds | 25 | |
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26 |
Abbott Laboratories and Subsidiaries
Condensed Consolidated Statement of Earnings
(Unaudited)
(dollars in millions except per share data; shares in thousands)
|
| Three Months Ended March 31 |
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| 2015 |
| 2014 |
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| Three Months Ended March 31 |
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| 2016 |
| 2015 |
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Net sales |
| $ | 4,897 |
| $ | 4,755 |
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| $ | 4,885 |
| $ | 4,897 |
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Cost of products sold, excluding amortization of intangible assets |
| 2,081 |
| 2,274 |
|
| 2,140 |
| 2,081 |
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Amortization of intangible assets |
| 156 |
| 127 |
|
| 144 |
| 156 |
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Research and development |
| 313 |
| 369 |
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| 379 |
| 313 |
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Selling, general and administrative |
| 1,737 |
| 1,620 |
|
| 1,698 |
| 1,737 |
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Total operating cost and expenses |
| 4,287 |
| 4,390 |
|
| 4,361 |
| 4,287 |
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Operating earnings |
| 610 |
| 365 |
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| 524 |
| 610 |
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Interest expense |
| 37 |
| 36 |
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| 58 |
| 37 |
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Interest (income) |
| (21 | ) | (16 | ) |
| (33 | ) | (21 | ) | ||||
Net foreign exchange (gain) loss |
| (54 | ) | 1 |
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Net foreign exchange loss (gain) |
| 478 |
| (54 | ) | |||||||||
Other (income) expense, net |
| (5 | ) | 3 |
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| 19 |
| (5 | ) | ||||
Earnings from continuing operations before taxes |
| 653 |
| 341 |
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Taxes on earnings from continuing operations |
| 124 |
| 117 |
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Earnings from continuing operations before tax |
| 2 |
| 653 |
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Tax (benefit) expense on earnings from continuing operations |
| (54 | ) | 124 |
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Earnings from continuing operations |
| 529 |
| 224 |
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| 56 |
| 529 |
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Earnings from discontinued operations, net of tax |
| 26 |
| 151 |
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| 244 |
| 26 |
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Gain on sale of discontinued operations, net of tax |
| 1,737 |
| — |
|
| 16 |
| 1,737 |
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Net earnings from discontinued operations, net of tax |
| 1,763 |
| 151 |
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| 260 |
| 1,763 |
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Net Earnings |
| $ | 2,292 |
| $ | 375 |
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| $ | 316 |
| $ | 2,292 |
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Basic Earnings Per Common Share — |
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Continuing operations |
| $ | 0.35 |
| $ | 0.14 |
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| $ | 0.04 |
| $ | 0.35 |
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Discontinued operations |
| 1.17 |
| 0.10 |
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| 0.17 |
| 1.17 |
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Net earnings |
| $ | 1.52 |
| $ | 0.24 |
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| $ | 0.21 |
| $ | 1.52 |
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Diluted Earnings Per Common Share — |
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Continuing operations |
| $ | 0.35 |
| $ | 0.14 |
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| $ | 0.04 |
| $ | 0.35 |
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Discontinued operations |
| 1.16 |
| 0.10 |
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| 0.17 |
| 1.16 |
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Net earnings |
| $ | 1.51 |
| $ | 0.24 |
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| $ | 0.21 |
| $ | 1.51 |
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Cash Dividends Declared Per Common Share |
| $ | 0.24 |
| $ | 0.22 |
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| $ | 0.26 |
| $ | 0.24 |
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Average Number of Common Shares Outstanding Used for Basic Earnings Per Common Share |
| 1,504,995 |
| 1,532,810 |
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| 1,477,332 |
| 1,504,995 |
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Dilutive Common Stock Options |
| 10,542 |
| 14,881 |
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| 6,341 |
| 10,542 |
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Average Number of Common Shares Outstanding Plus Dilutive Common Stock Options |
| 1,515,537 |
| 1,547,691 |
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| 1,483,673 |
| 1,515,537 |
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Outstanding Common Stock Options Having No Dilutive Effect |
| 5,263 |
| 4,421 |
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| 5,881 |
| 5,263 |
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The accompanying notes to condensed consolidated financial statements are an integral part of this statement.
Abbott Laboratories and Subsidiaries
Condensed Consolidated Statement of Comprehensive Income
(Unaudited)
(dollars in millions)
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| Three Months Ended March 31 |
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| 2015 |
| 2014 |
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Net earnings |
| $ | 2,292 |
| $ | 375 |
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Foreign currency translation (loss) gain adjustments |
| (911 | ) | 62 |
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Net actuarial gains (losses) and amortization of net actuarial (losses) and prior service (cost) and credits, net of taxes of $15 in 2015 and $8 in 2014 |
| 31 |
| 16 |
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Unrealized gains on marketable equity securities, net of taxes of $88 in 2015 and nil in 2014 |
| 173 |
| — |
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Net adjustments for derivative instruments designated as cash flow hedges, net of taxes of $7 in 2015 and nil in 2014 |
| 26 |
| — |
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Other comprehensive (loss) income |
| (681 | ) | 78 |
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Comprehensive Income |
| $ | 1,611 |
| $ | 453 |
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| Three Months Ended March 31 |
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| 2016 |
| 2015 |
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Net earnings |
| $ | 316 |
| $ | 2,292 |
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Foreign currency translation gain (loss) adjustments |
| 421 |
| (911 | ) | ||
Net actuarial gains (losses) and amortization of net actuarial (losses) and prior service (cost) and credits, net of taxes of $9 in 2016 and $15 in 2015 |
| 18 |
| 31 |
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Unrealized (losses) gains on marketable equity securities, net of taxes of nil in 2016 and $88 in 2015 |
| (543 | ) | 173 |
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Net (losses) gains for derivative instruments designated as cash flow hedges, net of taxes of $(22) in 2016 and $7 in 2015 |
| (89 | ) | 26 |
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Other comprehensive (loss) |
| (193 | ) | (681 | ) | ||
Comprehensive Income |
| $ | 123 |
| $ | 1,611 |
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| March 31, |
| December 31, |
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| March 31, |
| December 31, |
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| 2015 |
| 2014 |
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| 2016 |
| 2015 |
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Supplemental Accumulated Other Comprehensive Income (Loss) Information, net of tax: |
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Cumulative foreign currency translation (loss) adjustments |
| $ | (3,727 | ) | $ | (2,924 | ) |
| $ | (4,408 | ) | $ | (4,829 | ) |
Net actuarial (losses) and prior service (cost) and credits |
| (2,179 | ) | (2,229 | ) |
| (1,940 | ) | (1,958 | ) | ||||
Cumulative unrealized gains on marketable equity securities |
| 174 |
| 1 |
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Cumulative gains on derivative instruments designated as cash flow hedges |
| 125 |
| 99 |
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Cumulative unrealized (losses) gains on marketable equity securities |
| (478 | ) | 65 |
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Cumulative (losses) gains on derivative instruments designated as cash flow hedges |
| (25 | ) | 64 |
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The accompanying notes to condensed consolidated financial statements are an integral part of this statement.
Abbott Laboratories and Subsidiaries
Condensed Consolidated Balance Sheet
(Unaudited)
(dollars in millions)
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| March 31, |
| December 31, |
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| March 31, |
| December 31, |
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Assets |
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Current Assets: |
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Cash and cash equivalents |
| $ | 3,226 |
| $ | 4,063 |
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| $ | 3,334 |
| $ | 5,001 |
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Short-term investments |
| 6,623 |
| 397 |
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| 623 |
| 1,124 |
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Trade receivables, less allowances of $317 in 2015 and $310 in 2014 |
| 3,481 |
| 3,586 |
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Trade receivables, less allowances of $350 in 2016 and $337 in 2015 |
| 3,430 |
| 3,418 |
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Inventories: |
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Finished products |
| 1,780 |
| 1,807 |
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| 1,980 |
| 1,744 |
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Work in process |
| 287 |
| 278 |
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| 306 |
| 316 |
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Materials |
| 556 |
| 558 |
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| 500 |
| 539 |
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Total inventories |
| 2,623 |
| 2,643 |
|
| 2,786 |
| 2,599 |
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Prepaid expenses, deferred income taxes, and other receivables |
| 3,859 |
| 3,680 |
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Prepaid expenses and other receivables |
| 2,157 |
| 1,908 |
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Current assets held for disposition |
| 173 |
| 892 |
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| 76 |
| 105 |
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Total Current Assets |
| 19,985 |
| 15,261 |
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| 12,406 |
| 14,155 |
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Investments |
| 244 |
| 229 |
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| 3,552 |
| 4,041 |
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Property and equipment, at cost |
| 12,251 |
| 12,632 |
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| 12,709 |
| 12,383 |
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Less: accumulated depreciation and amortization |
| 6,552 |
| 6,697 |
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| 6,873 |
| 6,653 |
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Net property and equipment |
| 5,699 |
| 5,935 |
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| 5,836 |
| 5,730 |
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Intangible assets, net of amortization |
| 5,979 |
| 6,198 |
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| 5,458 |
| 5,562 |
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Goodwill |
| 9,855 |
| 10,067 |
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| 9,775 |
| 9,638 |
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Deferred income taxes and other assets |
| 1,330 |
| 1,651 |
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| 2,608 |
| 2,119 |
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Non-current assets held for disposition |
| 3 |
| 1,934 |
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| 2 |
| 2 |
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| $ | 43,095 |
| $ | 41,275 |
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| $ | 39,637 |
| $ | 41,247 |
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Liabilities and Shareholders’ Investment |
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Current Liabilities: |
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Short-term borrowings |
| $ | 2,921 |
| $ | 4,382 |
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| $ | 2,610 |
| $ | 3,127 |
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Trade accounts payable |
| 1,012 |
| 1,064 |
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| 1,053 |
| 1,081 |
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Salaries, wages and commissions |
| 649 |
| 776 |
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| 606 |
| 746 |
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Other accrued liabilities |
| 3,380 |
| 2,943 |
|
| 3,118 |
| 3,043 |
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Dividends payable |
| 358 |
| 362 |
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| 382 |
| 383 |
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Income taxes payable |
| 534 |
| 270 |
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| 261 |
| 430 |
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Current portion of long-term debt |
| 51 |
| 55 |
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| 3 |
| 3 |
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Current liabilities held for disposition |
| 301 |
| 680 |
|
| 360 |
| 373 |
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Total Current Liabilities |
| 9,206 |
| 10,532 |
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| 8,393 |
| 9,186 |
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Long-term debt |
| 5,931 |
| 3,408 |
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| 5,977 |
| 5,871 |
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Post-employment obligations, deferred income taxes and other long-term liabilities |
| 5,970 |
| 5,588 |
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| 4,425 |
| 4,864 |
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Non-current liabilities held for disposition |
| — |
| 108 |
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Commitments and Contingencies |
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Shareholders’ Investment: |
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Preferred shares, one dollar par value Authorized — 1,000,000 shares, none issued |
| — |
| — |
|
| — |
| — |
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Common shares, without par value Authorized - 2,400,000,000 shares Issued at stated capital amount - Shares: 2015: 1,698,124,396; 2014: 1,694,929,949 |
| 12,462 |
| 12,383 |
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Common shares held in treasury, at cost - Shares: 2015: 209,367,078; 2014: 186,894,515 |
| (9,721 | ) | (8,678 | ) | |||||||||
Common shares, without par value Authorized - 2,400,000,000 shares Issued at stated capital amount - Shares: 2016: 1,704,495,344; 2015: 1,702,017,390 |
| 12,744 |
| 12,734 |
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Common shares held in treasury, at cost - Shares: 2016: 235,343,311; 2015: 229,352,338 |
| (10,825 | ) | (10,622 | ) | |||||||||
Earnings employed in the business |
| 24,740 |
| 22,874 |
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| 25,654 |
| 25,757 |
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Accumulated other comprehensive income (loss) |
| (5,607 | ) | (5,053 | ) |
| (6,851 | ) | (6,658 | ) | ||||
Total Abbott Shareholders’ Investment |
| 21,874 |
| 21,526 |
|
| 20,722 |
| 21,211 |
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Noncontrolling Interests in Subsidiaries |
| 114 |
| 113 |
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| 120 |
| 115 |
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Total Shareholders’ Investment |
| 21,988 |
| 21,639 |
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| 20,842 |
| 21,326 |
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| $ | 43,095 |
| $ | 41,275 |
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| $ | 39,637 |
| $ | 41,247 |
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The accompanying notes to condensed consolidated financial statements are an integral part of this statement.
Abbott Laboratories and Subsidiaries
Condensed Consolidated Statement of Cash Flows
(Unaudited)
(dollars in millions)
|
| Three Months Ended March 31 |
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| Three Months Ended March 31 |
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| 2015 |
| 2014 |
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| 2016 |
| 2015 |
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Cash Flow From (Used in) Operating Activities: |
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Net earnings |
| $ | 2,292 |
| $ | 375 |
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| $ | 316 |
| $ | 2,292 |
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Adjustments to reconcile earnings to net cash from operating activities - |
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Depreciation |
| 215 |
| 224 |
|
| 203 |
| 215 |
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Amortization of intangibles |
| 156 |
| 174 |
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Amortization of intangible assets |
| 144 |
| 156 |
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Share-based compensation |
| 148 |
| 119 |
|
| 152 |
| 148 |
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Impact of currency devaluation |
| 477 |
| — |
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Gain on sale of discontinued operations |
| (2,821 | ) | — |
|
| (25 | ) | (2,821 | ) | ||||
Trade receivables |
| (90 | ) | 82 |
|
| (4 | ) | (90 | ) | ||||
Inventories |
| (128 | ) | (90 | ) |
| (95 | ) | (128 | ) | ||||
Other, net |
| 230 |
| (548 | ) |
| (1,261 | ) | 230 |
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Net Cash From Operating Activities |
| 2 |
| 336 |
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Net Cash (Used in) From Operating Activities |
| (93 | ) | 2 |
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Cash Flow From (Used in) Investing Activities: |
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Acquisitions of property and equipment |
| (235 | ) | (255 | ) |
| (243 | ) | (235 | ) | ||||
Proceeds from business disposition |
| 230 |
| — |
|
| 25 |
| 230 |
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Purchases of investment securities, net |
| (213 | ) | (367 | ) | |||||||||
Sales (purchases) of investment securities, net |
| 446 |
| (213 | ) | |||||||||
Other |
| 13 |
| 27 |
|
| (2 | ) | 13 |
| ||||
Net Cash (Used in) Investing Activities |
| (205 | ) | (595 | ) | |||||||||
Net Cash From (Used in) Investing Activities |
| 226 |
| (205 | ) | |||||||||
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Cash Flow From (Used in) Financing Activities: |
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Net (repayments of) proceeds from short-term debt and other |
| (1,471 | ) | 1,213 |
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Net (repayments of) short-term debt and other |
| (583 | ) | (1,471 | ) | |||||||||
Proceeds from the issuance of long-term debt |
| 2,485 |
| — |
|
| — |
| 2,485 |
| ||||
Repayments of long-term debt |
| (10 | ) | — |
|
| (7 | ) | (10 | ) | ||||
Payment of contingent consideration |
| (25 | ) | — |
| |||||||||
Purchases of common shares |
| (1,346 | ) | (2,192 | ) |
| (519 | ) | (1,346 | ) | ||||
Proceeds from stock options exercised, including income tax benefit |
| 156 |
| 170 |
|
| 87 |
| 156 |
| ||||
Dividends paid |
| (364 | ) | (343 | ) |
| (385 | ) | (364 | ) | ||||
Net Cash (Used in) Financing Activities |
| (550 | ) | (1,152 | ) |
| (1,432 | ) | (550 | ) | ||||
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Effect of exchange rate changes on cash and cash equivalents |
| (84 | ) | (4 | ) |
| (368 | ) | (84 | ) | ||||
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Net Decrease in Cash and Cash Equivalents |
| (837 | ) | (1,415 | ) |
| (1,667 | ) | (837 | ) | ||||
Cash and Cash Equivalents, Beginning of Year |
| 4,063 |
| 3,475 |
|
| 5,001 |
| 4,063 |
| ||||
Cash and Cash Equivalents, End of Period |
| $ | 3,226 |
| $ | 2,060 |
|
| $ | 3,334 |
| $ | 3,226 |
|
The accompanying notes to condensed consolidated financial statements are an integral part of this statement.
Abbott Laboratories and Subsidiaries
Notes to Condensed Consolidated Financial Statements
March 31, 20152016
(Unaudited)
Note 1 — Basis of Presentation
The accompanying unaudited, condensed consolidated financial statements have been prepared pursuant to rules and regulations of the Securities and Exchange Commission and, therefore, do not include all information and footnote disclosures normally included in audited financial statements. However, in the opinion of management, all adjustments (which include only normal adjustments) necessary to present fairly the results of operations, financial position and cash flows have been made. It is suggested that these statements be read in conjunction with the financial statements included in Abbott’s Annual Report on Form 10-K for the year ended December 31, 2014.2015. The consolidated financial statements include the accounts of the parent company and subsidiaries, after elimination of intercompany transactions.
Note 2 — Discontinued Operations
On February 27, 2015, Abbott completed the sale of its developed markets branded generics pharmaceuticals business to Mylan Inc. (Mylan) for 110 million shares (or approximately 22%) of a newly formed entity (Mylan N.V.) that combined Mylan’s existing business and Abbott’s developed markets branded generics pharmaceuticals business. Mylan N.V. is publicly traded. Historically, this business was included in Abbott’s Established Pharmaceutical Products segment. Abbott retained its branded generics pharmaceuticals business in emerging markets. At the date of closing, the 110 million Mylan N.V. shares that Abbott received were valued at $5.77 billion and Abbott recorded an after-tax gain on the sale of the business of approximately $1.6 billion. The shareholder agreement with Mylan N.V. includes voting and other restrictions that prevent Abbott from exercising significant influence over the operating and financial policies of Mylan N.V.
At the close of this transaction, Abbott and Mylan entered into a transition services agreementsagreement pursuant to which Abbott and Mylan are providing various back office support services to each other on an interim transitional basis. Transition services may be provided for up to 2 years. Charges by Abbott under thesethis transition services agreementsagreement are recorded as a reduction of the costs to provide the respective service in the applicable expense category in the Condensed Consolidated Statement of Earnings. This transition support does not constitute significant continuing involvement in Mylan’s operations. Abbott also entered into manufacturing supply agreements with Mylan related to certain products, with the supply term ranging from 3 to 10 years and requiring a 2 year notice prior to termination. The cash flows associated with these transition serviceservices and manufacturing supply agreements are not expected to be significant, and therefore, these cash flows are not direct cash flows of the disposed component under Accounting Standards Codification 205.
In April 2015, Abbott sold 40.25 million of the 110 million ordinary shares of Mylan N.V. received in the sale of the developed markets branded generics pharmaceuticals business to Mylan. As a result of this sale, Abbott’s ownership interest in Mylan N.V. decreased to approximately 14%.
On February 10, 2015, Abbott completed the sale of its animal health business to Zoetis Inc. Abbott received cash proceeds of $230 million and reported an after taxafter-tax gain on the sale of approximately $131$130 million in the first quarter of 2015. In the first quarter of 2016, Abbott received an additional $25 million of proceeds related to the expiration of a holdback agreement associated with the sale of this business and reported an after-tax gain on the sale of discontinued operations of $16 million.
As a result of the disposition of the above businesses, the current and prior year operating results of these businesses up to the date of sale are reported as part of discontinued operations on the Earnings from Discontinued Operations, net of tax line in the Condensed Consolidated Statement of Earnings. Discontinued operations include an allocationThe cash flows associated with the developed markets branded generics pharmaceuticals and animal health businesses up to the date of interest expense assuming a uniform ratiodisposition are included in Abbott’s Condensed Consolidated Statement of consolidated debt to equity for all of Abbott’s historical operations.Cash Flows.
On January 1, 2013, Abbott completed the separation of AbbVie Inc. (AbbVie), which was formed to hold Abbott’s research-based proprietary pharmaceuticals business. For a small portion of AbbVie’s operations, the legal transfer of AbbVie’s assets (net of liabilities) did not occur with the separation of AbbVie on January 1, 2013 due to the time required to transfer marketing authorizations and other regulatory requirements in each of these countries. Under the terms of the separation agreement with Abbott, AbbVie is subject to the risks and entitled to the benefits generated by these operations and assets. The majority of these operations were transferred to AbbVie in 2013 and 2014. These assets and liabilities have been presented as held for disposition in the Condensed Consolidated Balance Sheet. Abbott has recorded a prepaid asset of $164$282 million for its obligation to transfer these net liabilities held for disposition to AbbVie.
Abbott has retained all liabilities for all U.S. federal and foreign income taxes on income prior to the separation, as well as certain non-income related taxes attributable to AbbVie’s business prior to the separation. AbbVie generally will be liable for all other taxes attributable to its business. EarningsNet earnings from discontinued operations reflect the recognition of a net tax benefit of $244 million and $13 million in the first quarter of 2016 and 2015, and 2014 reflect the recognition of $13 million and $36 million, respectively, of net tax benefits primarily as a result of the resolution of various tax positions related to AbbVie’s operations for years prior to the separation.
The following table summarizes the components of discontinued operations:
|
| Three Months Ended |
|
| Three Months Ended |
| ||||||||
(in millions) |
| 2015 |
| 2014 |
|
| 2016 |
| 2015 |
| ||||
Net Sales |
|
|
|
|
|
|
|
|
|
| ||||
Developed markets generics pharmaceuticals and animal health businesses |
| $ | 256 |
| $ | 489 |
|
| $ | — |
| $ | 256 |
|
AbbVie |
| — |
| — |
|
| — |
| — |
| ||||
Total |
| $ | 256 |
| $ | 489 |
|
| $ | — |
| $ | 256 |
|
Earnings Before Tax |
|
|
|
|
| |||||||||
Earnings (Loss) Before Tax |
|
|
|
|
| |||||||||
Developed markets generics pharmaceuticals and animal health businesses |
| $ | 25 |
| $ | 82 |
|
| $ | (3 | ) | $ | 25 |
|
AbbVie |
| — |
| — |
|
| — |
| — |
| ||||
Total |
| $ | 25 |
| $ | 82 |
|
| $ | (3 | ) | $ | 25 |
|
Income Tax Expense (Benefit) |
|
|
|
|
|
|
|
|
|
| ||||
Developed markets generics pharmaceuticals and animal health businesses |
| $ | 12 |
| $ | (33 | ) |
| $ | (3 | ) | $ | 12 |
|
AbbVie |
| (13 | ) | (36 | ) |
| (244 | ) | (13 | ) | ||||
Total |
| $ | (1 | ) | $ | (69 | ) |
| $ | (247 | ) | $ | (1 | ) |
Net Earnings |
|
|
|
|
|
|
|
|
|
| ||||
Developed markets generics pharmaceuticals and animal health businesses |
| $ | 13 |
| $ | 115 |
|
| $ | — |
| $ | 13 |
|
AbbVie |
| 13 |
| 36 |
|
| 244 |
| 13 |
| ||||
Total |
| $ | 26 |
| $ | 151 |
|
| $ | 244 |
| $ | 26 |
|
The sale of the developed markets branded generics pharmaceuticals and animal health businesses in the first quarter of 2015 resulted in the recognition of a pretax gain of $2.821 billion, tax expense of $1.084 billion and an after taxafter-tax gain of $1.737 billion.
The assets of the operations held for disposition and the liabilities to be assumed in the disposition related to the businesses noted above, as well as the AbbVie assets and liabilities are classified as held for disposition in the Condensed Consolidated Balance Sheet as of March 31, 20152016 and December 31, 2014. The cash flows associated with the developed markets branded generics pharmaceuticals and animal health businesses are included in Abbott’s Condensed Consolidated Statement of Cash Flows up2015, relate to the date of disposition.AbbVie businesses. The following is a summary of the assets and liabilities held for disposition:
(in millions) |
| March 31, |
| December 31, |
| ||
Trade receivables, net |
| $ | 91 |
| $ | 498 |
|
Total inventories |
| 54 |
| 254 |
| ||
Prepaid expenses, deferred income taxes, and other receivables |
| 28 |
| 140 |
| ||
Current assets held for disposition |
| 173 |
| 892 |
| ||
Net property and equipment |
| 2 |
| 125 |
| ||
Intangible assets, net of amortization |
| — |
| 804 |
| ||
Goodwill |
| — |
| 950 |
| ||
Deferred income taxes and other assets |
| 1 |
| 55 |
| ||
Non-current assets held for disposition |
| 3 |
| 1,934 |
| ||
Total assets held for disposition |
| $ | 176 |
| $ | 2,826 |
|
|
|
|
|
|
| ||
Trade accounts payable |
| $ | 286 |
| $ | 423 |
|
Salaries, wages, commissions and other accrued liabilities |
| 15 |
| 257 |
| ||
Current liabilities held for disposition |
| 301 |
| 680 |
| ||
Post-employment obligations, deferred income taxes and other long-term liabilities |
| — |
| 108 |
| ||
Total liabilities held for disposition |
| $ | 301 |
| $ | 788 |
|
(in millions) |
| March 31, |
| December 31, |
| ||
Cash and Trade receivables, net |
| $ | 44 |
| $ | 54 |
|
Total inventories |
| 29 |
| 43 |
| ||
Prepaid expenses and other receivables |
| 3 |
| 8 |
| ||
Current assets held for disposition |
| 76 |
| 105 |
| ||
Net property and equipment |
| 2 |
| 1 |
| ||
Deferred income taxes and other assets |
| — |
| 1 |
| ||
Non-current assets held for disposition |
| 2 |
| 2 |
| ||
Total assets held for disposition |
| $ | 78 |
| $ | 107 |
|
|
|
|
|
|
| ||
Trade accounts payable |
| $ | 357 |
| $ | 359 |
|
Salaries, wages, commissions and other accrued liabilities |
| 3 |
| 14 |
| ||
Current liabilities held for disposition |
| 360 |
| 373 |
| ||
Post-employment obligations, deferred income taxes and other long-term liabilities |
| — |
| — |
| ||
Total liabilities held for disposition |
| $ | 360 |
| $ | 373 |
|
Note 3 — Supplemental Financial Information
Shares of unvested restricted stock that contain non-forfeitable rights to dividends are treated as participating securities and are included in the computation of earnings per share under the two-class method. Under the two-class method, net earnings are allocated between common shares and participating securities. Earnings from Continuing Operations allocated to common shares for the three months ended March 31, 2016 and 2015 and 2014 were $526$55 million and $223$526 million, respectively. Net earnings allocated to common shares for the three months ended March 31, 2016 and 2015 and 2014 were $2,281$315 million and $373$2,281 million, respectively.
Other, net in Net cash from operating activities in the Condensed Consolidated Statement of Cash Flows for the first three months of 20152016 and 20142015 includes the effects of contributions to defined benefit plans of $529$491 million and $312$529 million, respectively, and to the post-employment medical and dental benefit plans of $9 million in 2016 and $24 million in 2015 and $402015. The first quarter of 2016 also includes the non-cash impact of approximately $390 million in 2014.of net tax benefits primarily associated with the resolution of various tax positions from prior years, as well as cash taxes paid of approximately $125 million related to the disposition of businesses. The first quarter of 2015 includes the non-cash impact of approximately $1.1 billion of tax expense associated with the gain on the sale of businesses andbusinesses. The foreign currency loss related to Venezuela in the first quarter of 2016 reduced Abbott’s cash by approximately $405 million and is shown on the Effect of exchange rate changes on cash and cash equivalents line within the Condensed Consolidated Statement of Cash Flows.
Since January 2010, Venezuela has been designated as a highly inflationary economy under U.S. GAAP. In 2014 includesand 2015, the government of Venezuela operated multiple mechanisms to exchange bolivars into U.S. dollars. These mechanisms included the CENCOEX, SICAD, and SIMADI rates, which stood at 6.3, 13.5, and approximately $110 million200, respectively, at December 31, 2015. In 2015, Abbott continued to use the CENCOEX rate of tax benefits from6.3 Venezuelan bolivars to the resolutionU.S. dollar to report the results, financial position, and cash flows related to its operations in Venezuela since Abbott continued to qualify for this exchange rate to pay for the import of various tax positions pertaining to prior years.products into Venezuela.
On February 17, 2016, the Venezuelan government announced that the three-tier exchange rate system would be reduced to two rates renamed the DIPRO and DICOM rates. The DIPRO rate is the official rate for food and medicine imports and was adjusted from 6.3 to 10 bolivars per U.S. dollar. The DICOM rate is a floating market rate published daily by the Venezuelan central bank, which at the end of the first quarter of 2016 was approximately 263 bolivars per U.S. dollar. As a result of decreasing government approvals to convert bolivars to U.S. dollars to pay for intercompany accounts, as well as the accelerating deterioration of economic conditions in the country, Abbott concluded that it was appropriate to move to the DICOM rate at the end of the first quarter of 2016. As a result, Abbott recorded a foreign currency loss of $477 million in the first quarter of 2016 to revalue its net monetary assets in Venezuela. Abbott expects to use the DICOM rate for the remainder of 2016 to report the results of operations and to remeasure net monetary assets for Venezuela at the end of each quarter. After the revaluation, as of March 31, 2016, Abbott’s Venezuelan operations represented approximately 0.1% of Abbott’s consolidated assets and any additional foreign currency losses related to Venezuela are not expected to be material.
The components of short-term and long-term investments as of March 31, 20152016 and December 31, 20142015 are as follows:
Short-term Investments |
| March 31, |
| December 31, |
| ||
(in millions) |
| 2015 |
| 2014 |
| ||
Equity securities |
| $ | 6,034 |
| $ | — |
|
Other, primarily bank time deposits and U.S. treasury bills |
| 589 |
| 397 |
| ||
Total |
| $ | 6,623 |
| $ | 397 |
|
Long-term Investments |
|
|
|
|
|
| March 31, |
| December 31, |
| ||||
(in millions) |
|
|
|
|
|
| 2016 |
| 2015 |
| ||||
Equity securities |
| $ | 227 |
| $ | 212 |
|
| $ | 3,500 |
| $ | 4,014 |
|
Other |
| 17 |
| 17 |
|
| 52 |
| 27 |
| ||||
Total |
| $ | 244 |
| $ | 229 |
|
| $ | 3,552 |
| $ | 4,041 |
|
The short-term investments in equity securities reflect the 110 million of ordinary shares of Mylan N.V. received in the sale of the developed markets branded generics pharmaceuticals business.
In March 2015, Abbott issued $2.5 billion of long-term debt consisting of $750 million of 2.00% Senior Notes due March 15, 2020; $750 million of 2.55% Senior Notes due March 15, 2022; and $1.0 billion of 2.95% Senior Notes due March 15, 2025. Abbott also entered into interest rate swap contracts totaling $2.5 billion. These contracts have the effect of changing Abbott’s obligation from a fixed interest rate to a variable interest rate obligation.
Note 4 — Other Comprehensive Income
The components of the changes in other comprehensive income from continuing operations, net of income taxes, are as follows:
|
| Three Months Ended March 31 |
| ||||||||||||||||||||||
|
| Cumulative Foreign |
| Net Actuarial |
| Cumulative |
| Cumulative Gains |
| ||||||||||||||||
(in millions) |
| 2015 |
| 2014 |
| 2015 |
| 2014 |
| 2015 |
| 2014 |
| 2015 |
| 2014 |
| ||||||||
Balance at December 31, 2014 and 2013 |
| $ | (2,924 | ) | $ | (718 | ) | $ | (2,229 | ) | $ | (1,312 | ) | $ | 1 |
| $ | 13 |
| $ | 99 |
| $ | 5 |
|
Impact of business dispositions |
| 108 |
| — |
| 19 |
| — |
| — |
| — |
| — |
| — |
| ||||||||
Other comprehensive (loss) income before reclassifications |
| (911 | ) | 62 |
| — |
| — |
| 173 |
| 1 |
| 43 |
| (1 | ) | ||||||||
Amounts reclassified from accumulated other comprehensive income |
| — |
| — |
| 31 |
| 16 |
| — |
| (1 | ) | (17 | ) | 1 |
| ||||||||
Net current period comprehensive (loss) income |
| (911 | ) | 62 |
| 31 |
| 16 |
| 173 |
| — |
| 26 |
| — |
| ||||||||
Balance at March 31 |
| $ | (3,727 | ) | $ | (656 | ) | $ | (2,179 | ) | $ | (1,296 | ) | $ | 174 |
| $ | 13 |
| $ | 125 |
| $ | 5 |
|
|
| Three Months Ended March 31 |
| ||||||||||||||||||||||
|
| Cumulative Foreign |
| Net Actuarial |
| Cumulative |
| Cumulative Gains |
| ||||||||||||||||
(in millions) |
| 2016 |
| 2015 |
| 2016 |
| 2015 |
| 2016 |
| 2015 |
| 2016 |
| 2015 |
| ||||||||
Balance at December 31, 2015 and 2014 |
| $ | (4,829 | ) | $ | (2,924 | ) | $ | (1,958 | ) | $ | (2,229 | ) | $ | 65 |
| $ | 1 |
| $ | 64 |
| $ | 99 |
|
Impact of business dispositions |
| — |
| 108 |
| — |
| 19 |
| — |
| — |
| — |
| — |
| ||||||||
Other comprehensive (loss) income before reclassifications |
| 421 |
| (911 | ) | — |
| — |
| (543 | ) | 173 |
| (58 | ) | 43 |
| ||||||||
Amounts reclassified from accumulated other comprehensive income |
| — |
| — |
| 18 |
| 31 |
| — |
| — |
| (31 | ) | (17 | ) | ||||||||
Net current period comprehensive income (loss) |
| 421 |
| (911 | ) | 18 |
| 31 |
| (543 | ) | 173 |
| (89 | ) | 26 |
| ||||||||
Balance at March 31 |
| $ | (4,408 | ) | $ | (3,727 | ) | $ | (1,940 | ) | $ | (2,179 | ) | $ | (478 | ) | $ | 174 |
| $ | (25 | ) | $ | 125 |
|
Reclassified amounts for foreign currency translation are recorded in the Condensed Consolidated Statement of Earnings as Net foreign exchange loss (gain); loss; gains (losses) on marketable equity securities as Other (income) expense, net and cash flow hedges as Cost of products sold. Net actuarial losses and prior service cost is included as a component of net periodic benefit plan costs; see Note 11 for additional details.
Note 5 — Business Acquisitions
In September 2014,August 2015, Abbott completed the acquisition of the controlling interest in CFR Pharmaceuticals S.A. (CFR)equity of Tendyne Holdings, Inc. (Tendyne) that Abbott did not already own for approximately $2.9 billion in cash ($2.8 billion net of CFR cash on hand at closing). Including the assumption of approximately $570 million of debt, the total cost of the acquisition was $3.4 billion. The acquisition of CFR more than doubles Abbott’s branded generics pharmaceutical presence in Latin America and further expands its presence in emerging markets. CFR’s financial results are included in Abbott’s financial statements beginning on September 26, 2014, the date that Abbott acquired control of this business. Abbott owns 99.9% of the outstanding ordinary shares of CFR. The fair value of the non-controlling interest at the acquisition date was approximately $3 million. The acquisition was funded with cash and cash equivalents and short-term investments. The preliminary allocation of the fair value of the acquisition is shown in the table below. The allocation of the fair value of the acquisition will be finalized when the valuation is completed.
(in billions) |
|
|
| |
Acquired intangible assets, non-deductible |
| $ | 1.80 |
|
Goodwill, non-deductible |
| 1.60 |
| |
Acquired net tangible assets |
| 0.06 |
| |
Deferred income taxes recorded at acquisition |
| (0.54 | ) | |
Total preliminary allocation of fair value |
| $ | 2.92 |
|
Acquired intangible assets consist primarily of product rights for currently marketed products and are amortized over 12 to 16 years (average of 15 years). The goodwill is primarily attributable to intangible assets that do not qualify for separate recognition. The goodwill is identifiable to the Established Pharmaceutical Products segment. The acquired tangible assets consist primarily of cash and cash equivalents of approximately $94 million, trade accounts receivable of approximately $179 million, inventory of approximately $169 million, other current assets of approximately $51 million, property and equipment of approximately $209 million, and other long-term assets of approximately $138 million. Assumed liabilities consist of borrowings of approximately $570 million, trade accounts payable and other current liabilities of approximately $195 million and other noncurrent liabilities of approximately $15 million.
Annualized net sales for CFR Pharmaceuticals are expected to total approximately $800 million. Had the acquisition of CFR Pharmaceuticals taken place on January 1, 2013, the consolidated net sales and earnings of Abbott would not have been significantly different from the reported amounts.
In December 2014, Abbott acquired control of Veropharm, a leading Russian pharmaceutical company for approximately $315 million excluding assumed debt. Through this acquisition, Abbott establishes a manufacturing footprint in Russia and obtains a portfolio of medicines that is well aligned with Abbott’s current pharmaceutical therapeutic areas of focus. Abbott acquired control of Veropharm through its purchase of Limited Liability Company Garden Hills, the holding company that owns approximately 98 percent of Veropharm. Including the assumption of approximately $90 million of debt and a minority interest with a fair value of $5 million, the total value of the acquired business was approximately $410 million. The preliminary allocation of the fair value of the acquisition resulted in definite-lived non-deductible intangible assets of approximately $100 million, non-deductible goodwill of approximately $110 million, and net deferred tax liabilities of approximately $35 million. Non-deductible goodwill is identifiable with the Established Pharmaceutical Products segment. Additionally, Abbott acquired property, plant, and equipment of approximately $170 million, accounts receivable of approximately $45 million, inventory of approximately $25 million, and net other liabilities of approximately $5 million. Acquired intangible assets consist of developed technology and are being amortized over 16 years.
In December 2014, Abbott completed the acquisition of Topera, Inc. for approximately $250$225 million in cash plus additional payments up to $300$150 million to be made upon completion of certain regulatory and sales milestones. The acquisition of Topera providesTendyne, which is focused on developing minimally invasive mitral valve replacement therapies, allows Abbott a foundational entryto broaden its foundation in the electrophysiology market.treatment of mitral valve disease. The finalpreliminary allocation of the fair value of the acquisition resulted in non-deductible acquired in-process research and development of approximately $20$220 million, which is accounted for as an indefinite-lived intangible asset until regulatory approval or discontinuation, non-deductible definite-lived intangiblesgoodwill of approximately $142 million, other assets of approximately $325 million, non-deductible goodwill of approximately $175$13 million, net deferred tax liabilities of approximately $105$80 million, and contingent consideration of approximately $165$70 million. The fair value of the contingent consideration was determined based on an independent appraisal. Acquired intangible assets consist of developed technology and trademarks, and are being amortized over 16 years.
The preliminary allocations of the fair value of the acquisitions of CFR Pharmaceuticals and Veropharmthis acquisition will be finalized when valuations arethe valuation is completed.
Had the aggregatethis acquisition taken place as of the above acquisitions taken place on January 1, 2013,beginning of the comparable prior annual reporting period, consolidated net sales and earnings would not have been significantly different from reported amounts.
On January 30, 2016, Abbott entered into a definitive agreement to acquire Alere Inc. (Alere). With annual sales of approximately $2.5 billion, Alere is a global leader in point of care diagnostics. The acquisition, which is expected to significantly advance Abbott’s global diagnostics presence and leadership, is subject to the approval of Alere shareholders and the satisfaction of customary closing conditions, including applicable regulatory approvals. On March 15, 2016, Alere filed a Form 8-K stating that it will not be able to file its 2015 Form 10-K until it completes its analysis of the timing of revenue recognition in Africa and China. In its Form 8-K, Alere also stated
that it does not expect to mail a definitive proxy statement related to obtaining the Alere shareholders’ approval of the acquisition by Abbott until after Alere files its 2015 Form 10-K. On May 2, 2016, Abbott and Alere received a request for additional information from the United States Federal Trade Commission (FTC) relating to Abbott’s potential acquisition of Alere. The effect of this request, which was issued under the Hart-Scott Rodino (HSR) Antitrust Improvements Act of 1976, as amended, is to extend the waiting period imposed by the HSR Act until 30 days after Abbott and Alere have substantially complied with this request, unless the period is extended voluntarily by the parties or terminated sooner by the FTC.
Under the terms of the agreement, Abbott will pay $56 per common share at a total expected equity value of $5.8 billion. Alere’s 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 acquisition 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.
Note 6 — Goodwill and Intangible Assets
The total amount of goodwill reported was $9.855$9.775 billion at March 31, 20152016 and $10.067$9.638 billion at December 31, 2014, which excluded2015. Foreign currency translation adjustments increased goodwill classified as held for disposition. As part of the disposal of the developed markets branded generics pharmaceuticals businessby approximately $127 million in the first quarter of 2015, $894 million of goodwill2016. There was included as part of the net assets sold. In the first quarter of 2015, foreign currency translation adjustments decreased goodwill by approximately $267 million, whileno purchase price allocation adjustments associated with recent acquisitions increased goodwill by approximately $55 million.made during the quarter. The amount of goodwill related to reportable segments at March 31, 20152016 was $3.3$3.0 billion for the Established Pharmaceutical Products segment, $286 million for the Nutritional Products segment, $444$450 million for the Diagnostic Products segment, and $2.9 billion for the Vascular Products segment. There was no reduction of goodwill relating to impairments.
The gross amount of amortizable intangible assets, primarily product rights and technology was $10.9 billion as of March 31, 20152016 and $10.8 billion as of December 31, 2014,2015, and accumulated amortization was $5.0$5.8 billion as of March 31, 20152016 and $4.9$5.7 billion as of December 31, 2014. The December 31, 2014 amounts exclude2015. Foreign currency translation adjustments increased intangible assets by $55 million during the intangibles that were classified as held for disposition. $738 million of intangibles were included in the net assets transferred as part of the disposal of the developed markets branded generics pharmaceuticals business in the first quarter of 2015.quarter. Indefinite-lived intangible assets, which relate to in-process research and development acquired in a business combination, waswere approximately $134$403 million atand $419 million as of March 31, 20152016 and December 31, 2014.2015, respectively. In the first quarter of 2016, Abbott recorded an impairment of a $43 million in-process research and development project related to a non-reportable segment. Abbott’s estimated annual amortization expense for intangible assets is approximately $680 million in 2015, $660$580 million in 2016, $650$560 million in 2017, $570$520 million in 2018, and $530$490 million in 2019.2019 and $480 million in 2020. Amortizable intangible assets are amortized over 2 to 20 years (weighted average 1214 years).
Note 7 — Restructuring Plans
In 2015 and 2014, Abbott management approved plans to streamline operations in order to reduce costs and improve efficiencies in various Abbott businesses including the nutritional, and established pharmaceuticals and vascular businesses. In the first quarterthree months of 2015, additional2016, charges of approximately $13$7 million were recognized, of which approximately $1 million is recorded primarily for accelerated depreciation.as Cost of products sold and approximately $6 million as Selling, general and administrative expense. The following summarizes the activity for the first three months of 20152016 related to these restructuring actions and the status of the related accrual as of March 31, 2015:2016:
(in millions) |
|
|
|
|
|
| ||
Accrued balance at December 31, 2014 |
| $ | 118 |
| ||||
Accrued balance at December 31, 2015 |
| $ | 100 |
| ||||
Restructuring charges recorded in 2016 |
| 7 |
| |||||
Payments and other adjustments |
| (15 | ) |
| (13 | ) | ||
Accrued balance at March 31, 2015 |
| $ | 103 |
| ||||
Accrued balance at March 31, 2016 |
| $ | 94 |
|
From 2013 to 2015, Abbott management approved various plans to reduce costs and improve efficiencies across various functional areas. In the first quarterthree months of 2015,2016, charges of approximately $8$9 million were recognized of which approximately $1 million is recorded in Cost of products sold and approximately $7 million as Selling, general and administrative expense. In 2013, Abbott management also approved plans to streamline certain manufacturing operations in order to reduce costs and improve efficiencies in Abbott’s established pharmaceuticals business. In 2012, Abbott management approved plans to streamline various commercial operations in order to reduce costs and improve efficiencies in Abbott’s core diagnostics, established pharmaceuticals and nutritionals businesses. The following summarizes the activity for the first three months of 20152016 related to these restructuring actions and the status of the related accrual as of March 31, 2015:2016:
(in millions) |
|
|
| |
Accrued balance at December 31, 2014 |
| $ | 135 |
|
Restructuring charges recorded in 2015 |
| 8 |
| |
Payments and other adjustments |
| (34 | ) | |
Accrued balance at March 31, 2015 |
| $ | 109 |
|
(in millions) |
|
|
| |
Accrued balance at December 31, 2015 |
| $ | 88 |
|
Restructuring charges recorded in 2016 |
| 9 |
| |
Payments and other adjustments |
| (29 | ) | |
Accrued balance at March 31, 2016 |
| $ | 68 |
|
In 2013 and prior years, Abbott management approved plans to realignstreamline global manufacturing operations, reduce overall costs and improve efficiencies in its worldwide pharmaceutical, vascular manufacturing operations and core diagnostics business in order to reduce costs.businesses as well as selected domestic and international commercial and research and development operations. The following summarizes the activity for the first three months of 20152016 related to these restructuring actions and the status of the related accrual as of March 31, 2015:2016:
(in millions) |
|
|
| |
Accrued balance at December 31, 2014 |
| $ | 39 |
|
Payments and other adjustments |
| (6 | ) | |
Accrued balance at March 31, 2015 |
| $ | 33 |
|
(in millions) |
|
|
| |
Accrued balance at December 31, 2015 |
| $ | 11 |
|
Payments and other adjustments |
| (2 | ) | |
Accrued balance at March 31, 2016 |
| $ | 9 |
|
Note 8 — Incentive Stock Programs
In the first three months of 2015,2016, Abbott granted 5,057,2877,672,867 stock options, 634,362776,510 restricted stock awards and 5,398,0497,052,568 restricted stock units under its incentive stock programs. At March 31, 2015,2016, approximately 8756 million shares were reserved for future grants. Information regarding the number of options outstanding and exercisable at March 31, 20152016 is as follows:
|
| Outstanding |
| Exercisable |
|
| Outstanding |
| Exercisable |
| ||||
Number of shares |
| 38,316,478 |
| 28,926,890 |
|
| 39,237,036 |
| 26,260,859 |
| ||||
Weighted average remaining life (years) |
| 4.9 |
| 3.5 |
|
| 5.6 |
| 3.8 |
| ||||
Weighted average exercise price |
| $ | 30.66 |
| $ | 26.76 |
|
| $ | 33.59 |
| $ | 29.89 |
|
Aggregate intrinsic value (in millions) |
| $ | 605 |
| $ | 567 |
|
| $ | 355 |
| $ | 324 |
|
The total unrecognized share-based compensation cost at March 31, 20152016 amounted to approximately $288$322 million which is expected to be recognized over the next three years.
Note 9 — Financial Instruments, Derivatives and Fair Value Measures
Certain Abbott foreign subsidiaries enter into foreign currency forward exchange contracts to manage exposures to changes in foreign exchange rates for anticipated intercompany purchases by those subsidiaries whose functional currencies are not the U.S. dollar. These contracts, with gross notional amounts totaling $1.5$2.3 billion at March 31, 20152016 and $2.4 billion at December 31, 20142015 are designated as cash flow hedges of the variability of the cash flows due to changes in foreign exchange rates and are recorded at fair value. Accumulated gains and losses as of March 31, 20152016 will be included in Cost of products sold at the time the products are sold, generally through the next twelve to eighteen months. The amount of hedge ineffectiveness was not significant in 20152016 and 2014.2015.
Abbott enters into foreign currency forward exchange contracts to manage currency exposures for foreign currency denominated third-party trade payables and receivables, and for intercompany loans and trade accounts payable where the receivable or payable is denominated in a currency other than the functional currency of the entity. For intercompany loans, the contracts require Abbott to sell or buy foreign currencies, primarily European currencies and Japanese yen,including the British pound, in exchange for primarily U.S. dollars and other European currencies. For intercompany and trade payables and receivables, the currency exposures are primarily the U.S. dollar and European currencies and Japanese yen.currencies. At March 31, 20152016 and December 31, 2014,2015, Abbott held $13.8the gross notional amount of $15.3 billion and $14.1$14.0 billion, respectively, of such foreign currency forward exchange contracts.
Abbott has designated foreign denominated short-term debt as a hedge of the net investment in a foreign subsidiary of approximately $442$471 million and approximately $445$439 million as of March 31, 20152016 and December 31, 2014,2015, respectively. Accordingly, changes in the reported value of this debt due to changes in exchange rates are recorded in Accumulated other comprehensive income (loss), net of tax.
Abbott is a party to interest rate hedge contracts totaling approximately $4.0 billion at March 31, 20152016 and $1.5 billion at December 31, 20142015 to manage its exposure to changes in the fair value of fixed-rate debt. These contracts are designated as fair value hedges of the variability of the fair value of fixed-rate debt due to changes in the long-term benchmark interest rates. The effect of the hedge is to change a fixed-rate interest obligation to a variable rate for that portion of the debt. Abbott records the contracts at fair value and adjusts the carrying amount of the fixed-rate debt by an offsetting amount. NoThe amount of hedge ineffectiveness was recordednot significant in income in 2015 or 2014 for these hedges.2016 and 2015.
The following table summarizes the amounts and location of certain derivative financial instruments as of March 31, 20152016 and December 31, 2014:2015:
|
| Fair Value - Assets |
| Fair Value - Liabilities |
|
| Fair Value - Assets |
| Fair Value - Liabilities |
| ||||||||||||||||||||||||
(in millions) |
| March 31, |
| Dec. 31, |
| Balance Sheet Caption |
| March 31, |
| Dec. 31, |
| Balance Sheet Caption |
|
| March 31, |
| Dec. 31, |
| Balance Sheet Caption |
| March 31, |
| Dec. 31, |
| Balance Sheet Caption |
| ||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||
Interest rate swaps designated as fair value hedges |
| $ | 150 |
| $ | 101 |
| Deferred income taxes and other assets |
| $ | — |
| $ | — |
| n/a |
|
| $ | 217 |
| $ | 116 |
| Deferred income taxes and other assets |
| $ | — |
| $ | — |
| n/a |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||
Foreign currency forward exchange contracts: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||
Hedging instruments |
| 120 |
| 107 |
| Prepaid expenses, deferred income taxes, and other receivables |
| 10 |
| — |
| Other accrued liabilities |
|
| 27 |
| 64 |
| Prepaid expenses and other receivables |
| 63 |
| 18 |
| Other accrued liabilities |
| ||||||||
Others not designated as hedges |
| 324 |
| 150 |
| Prepaid expenses, deferred income taxes, and other receivables |
| 107 |
| 130 |
| Other accrued liabilities |
|
| 158 |
| 115 |
| Prepaid expenses and other receivables |
| 154 |
| 84 |
| Other accrued liabilities |
| ||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||
Debt designated as a hedge of net investment in a foreign subsidiary |
| — |
| — |
| n/a |
| 442 |
| 445 |
| Short-term borrowings |
|
| — |
| — |
| n/a |
| 471 |
| 439 |
| Short-term borrowings |
| ||||||||
|
| $ | 594 |
| $ | 358 |
|
|
| $ | 559 |
| $ | 575 |
|
|
|
| $ | 402 |
| $ | 295 |
|
|
| $ | 688 |
| $ | 541 |
|
|
|
The following table summarizes the activity for foreign currency forward exchange contracts designated as cash flow hedges, debt designated as a hedge of net investment in a foreign subsidiary and the amounts and location of income (expense) and gain (loss) reclassified into income in the first three months of 20152016 and 20142015 and for certain other derivative financial instruments. The amount of hedge ineffectiveness was not significant in 20152016 and 20142015 for these hedges.
|
| Gain (loss) Recognized in |
| Income (expense) and |
|
|
|
| Gain (loss) Recognized in |
| Income (expense) and |
|
|
| ||||||||||||||||
(in millions) |
| 2015 |
| 2014 |
| 2015 |
| 2014 |
| Income Statement Caption |
|
| 2016 |
| 2015 |
| 2016 |
| 2015 |
| Income Statement Caption |
| ||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||
Foreign currency forward exchange contracts designated as cash flow hedges |
| $ | 43 |
| $ | 2 |
| $ | 17 |
| $ | 3 |
| Cost of products sold |
|
| $ | (58 | ) | $ | 43 |
| $ | 31 |
| $ | 17 |
| Cost of products sold |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||
Debt designated as a hedge of net investment in a foreign subsidiary |
| 3 |
| (11 | ) | — |
| — |
| n/a |
|
| (32 | ) | 3 |
| — |
| — |
| n/a |
| ||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||
Interest rate swaps designated as fair value hedges |
| n/a |
| n/a |
| 49 |
| 11 |
| Interest expense |
|
| n/a |
| n/a |
| 101 |
| 49 |
| Interest expense |
| ||||||||
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||||||
Foreign currency forward exchange contracts not designated as a hedge |
| n/a |
| n/a |
| (16 | ) | (13 | ) | Net foreign exchange (gain) loss |
|
Gains of $141 million and $16 million were recognized in the first three months of 2016 and 2015, respectively, related to foreign currency forward exchange contracts not designated as a hedge. These amounts are reported in the Condensed Consolidated Statement of Earnings on the Net foreign exchange loss (gain) line.
The interest rate swaps are designated as fair value hedges of the variability of the fair value of fixed-rate debt due to changes in the long-term benchmark interest rates. The hedged debt is marked to market, offsetting the effect of marking the interest rate swaps to market.
The carrying values and fair values of certain financial instruments as of March 31, 20152016 and December 31, 20142015 are shown in the following table. The carrying values of all other financial instruments approximate their estimated fair values. The counterparties to financial instruments consist of select major international financial institutions. Abbott does not expect any losses from nonperformance by these counterparties.
|
| March 31, 2015 |
| December 31, 2014 |
|
| March 31, 2016 |
| December 31, 2015 |
| ||||||||||||||||
(in millions) |
| Carrying |
| Fair |
| Carrying |
| Fair |
|
| Carrying |
| Fair |
| Carrying |
| Fair |
| ||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||
Investment Securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||
Equity securities |
| $ | 6,261 |
| $ | 6,261 |
| $ | 212 |
| $ | 212 |
|
| $ | 3,500 |
| $ | 3,500 |
| $ | 4,014 |
| $ | 4,014 |
|
Other |
| 17 |
| 17 |
| 17 |
| 17 |
|
| 52 |
| 54 |
| 27 |
| 30 |
| ||||||||
Total Long-term Debt |
| (5,982 | ) | (6,749 | ) | (3,463 | ) | (4,113 | ) |
| (5,980 | ) | (6,621 | ) | (5,874 | ) | (6,337 | ) | ||||||||
Foreign Currency Forward Exchange Contracts: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||
Receivable position |
| 444 |
| 444 |
| 263 |
| 263 |
|
| 185 |
| 185 |
| 179 |
| 179 |
| ||||||||
(Payable) position |
| (117 | ) | (117 | ) | (135 | ) | (135 | ) |
| (217 | ) | (217 | ) | (102 | ) | (102 | ) | ||||||||
Interest Rate Hedge Contracts: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||
Receivable position |
| 150 |
| 150 |
| 101 |
| 101 |
|
| 217 |
| 217 |
| 116 |
| 116 |
|
The fair value of the debt was determined based on significant other observable inputs, including current interest rates.
The following table summarizes the bases used to measure certain assets and liabilities at fair value on a recurring basis in the balance sheet:
|
|
|
| Basis of Fair Value Measurement |
|
| Basis of Fair Value Measurement |
| ||||||||||||||||||
(in millions) |
| Outstanding |
| Quoted |
| Significant |
| Significant |
|
| Outstanding |
| Quoted |
| Significant |
| Significant |
| ||||||||
March 31, 2015: |
|
|
|
|
|
|
|
|
| |||||||||||||||||
March 31, 2016: |
|
|
|
|
|
|
|
|
| |||||||||||||||||
Equity securities |
| $ | 6,043 |
| $ | 9 |
| $ | 6,034 |
| $ | — |
|
| $ | 3,245 |
| $ | 3,245 |
| $ | — |
| $ | — |
|
Interest rate swap derivative financial instruments |
| 150 |
| — |
| 150 |
| — |
|
| 217 |
| — |
| 217 |
| — |
| ||||||||
Foreign currency forward exchange contracts |
| 444 |
| — |
| 444 |
| — |
|
| 185 |
| — |
| 185 |
| — |
| ||||||||
Total Assets |
| $ | 6,637 |
| $ | 9 |
| $ | 6,628 |
| $ | — |
|
| $ | 3,647 |
| $ | 3,245 |
| $ | 402 |
| $ | — |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||
Fair value of hedged long-term debt |
| $ | 4,173 |
| $ | — |
| $ | 4,173 |
| $ | — |
|
| $ | 4,242 |
| $ | — |
| $ | 4,242 |
| $ | — |
|
Foreign currency forward exchange contracts |
| 117 |
| — |
| 117 |
| — |
|
| 217 |
| — |
| 217 |
| — |
| ||||||||
Contingent consideration related to business combinations |
| 250 |
| — |
| — |
| 250 |
|
| 161 |
| — |
| — |
| 161 |
| ||||||||
Total Liabilities |
| $ | 4,540 |
| $ | — |
| $ | 4,290 |
| $ | 250 |
|
| $ | 4,620 |
| $ | — |
| $ | 4,459 |
| $ | 161 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||
December 31, 2014: |
|
|
|
|
|
|
|
|
| |||||||||||||||||
December 31, 2015: |
|
|
|
|
|
|
|
|
| |||||||||||||||||
Equity securities |
| $ | 9 |
| $ | 9 |
| $ | — |
| $ | — |
|
| $ | 3,780 |
| $ | 3,780 |
| $ | — |
| $ | — |
|
Interest rate swap derivative financial instruments |
| 101 |
| — |
| 101 |
| — |
|
| 116 |
| — |
| 116 |
| — |
| ||||||||
Foreign currency forward exchange contracts |
| 263 |
| — |
| 263 |
| — |
|
| 179 |
| — |
| 179 |
| — |
| ||||||||
Total Assets |
| $ | 373 |
| $ | 9 |
| $ | 364 |
| $ | — |
|
| $ | 4,075 |
| $ | 3,780 |
| $ | 295 |
| $ | — |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||
Fair value of hedged long-term debt |
| $ | 1,637 |
| $ | — |
| $ | 1,637 |
| $ | — |
|
| $ | 4,135 |
| $ | — |
| $ | 4,135 |
| $ | — |
|
Foreign currency forward exchange contracts |
| 135 |
| — |
| 135 |
| — |
|
| 102 |
| — |
| 102 |
| — |
| ||||||||
Contingent consideration related to business combinations |
| 243 |
| — |
| — |
| 243 |
|
| 173 |
| — |
| — |
| 173 |
| ||||||||
Total Liabilities |
| $ | 2,015 |
| $ | — |
| $ | 1,772 |
| $ | 243 |
|
| $ | 4,410 |
| $ | — |
| $ | 4,237 |
| $ | 173 |
|
Equity securities are principally comprised of Mylan N.V. ordinary shares. The fair value of the Mylan equity securities was determined based on the value of the publicly-traded ordinary shares adjusted for the restrictions related to the resale of these shares. The fair value of debt was determined based on the face value of the debt adjusted for the fair value of the interest rate swaps, which is based on a discounted cash flow analysis. The fair value of foreign currency forward exchange contracts is determined using a market approach, which utilizes values for comparable derivative instruments. The fair value of the contingent consideration was determined based on an independent appraisal adjusted for the time value of money and other changes in fair value.
The following table summarizes the available-for-sale equity securities in an unrealized loss position:
(in millions) |
| March 31, 2016 |
| December 31, 2015 |
| ||
Fair value of securities in an unrealized loss position |
| $ | 3,233 |
| $ | — |
|
Unrealized gross losses |
| 372 |
| — |
| ||
TableAvailable-for-sale securities are periodically assessed for other-than-temporary impairment losses. The unrealized losses relate to the holding of ContentsMylan N.V. ordinary shares, which have been in an unrealized loss position for less than three months at March 31, 2016. Factors considered in assessing other-than-temporary impairment losses include the length of time and the extent to which the fair value has been less than cost, the financial condition and near term prospects of the issuer, Abbott’s intent and ability to retain the securities for a period of time sufficient to allow for recovery in fair value, overall market conditions, and industry and company specific factors. Based on that evaluation and Abbott’s ability and intent to hold these investments for a reasonable period of time sufficient for a forecasted recovery of fair value, Abbott does not consider these securities to be other-than-temporarily impaired at March 31, 2016.
Note 10 — Litigation and Environmental Matters
Abbott has been identified as a potentially responsible party for investigation and cleanup costs at a number of locations in the United States and Puerto Rico under federal and state remediation laws and is investigating potential contamination at a number of company-owned locations. Abbott has recorded an estimated cleanup cost for each site for which management believes Abbott has a probable loss exposure. No individual site cleanup exposure is expected to exceed $4 million, and the aggregate cleanup exposure is not expected to exceed $15$10 million.
Abbott is involved in various claims and legal proceedings, and Abbott estimates the range of possible loss for its legal proceedings and environmental exposures to be from approximately $70$35 million to $85$50 million. The recorded accrual balance at March 31, 20152016 for these proceedings and exposures was approximately $80$45 million. This accrual represents management’s best estimate of probable loss, as defined by FASB ASC No. 450, “Contingencies.” Within the next year, legal proceedings may occur that may result in a change in the estimated loss accrued by Abbott. While it is not feasible to predict the outcome of all such proceedings and exposures with certainty, management believes that their ultimate disposition should not have a material adverse effect on Abbott’s financial position, cash flows, or results of operations.
Note 11 — Post-Employment Benefits
Retirement plans consist of defined benefit, defined contribution, and medical and dental plans. Net cost recognized in continuing operations for the three months ended March 31 for Abbott’s major defined benefit plans and post-employment medical and dental benefit plans is as follows:
|
| Defined Benefit Plans |
| Medical and Dental Plans |
|
| Defined Benefit Plans |
| Medical and Dental Plans |
| ||||||||||||||||
(in millions) |
| March 31, |
| March 31, |
| March 31, |
| March 31, |
|
| March 31, |
| March 31, |
| March 31, |
| March 31, |
| ||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||
Service cost - benefits earned during the period |
| $ | 82 |
| $ | 66 |
| $ | 9 |
| $ | 9 |
|
| $ | 67 |
| $ | 82 |
| $ | 7 |
| $ | 9 |
|
Interest cost on projected benefit obligations |
| 79 |
| 77 |
| 15 |
| 16 |
|
| 73 |
| 79 |
| 12 |
| 15 |
| ||||||||
Expected return on plan assets |
| (129 | ) | (113 | ) | (10 | ) | (10 | ) |
| (141 | ) | (129 | ) | (9 | ) | (10 | ) | ||||||||
Net amortization of: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||
Actuarial loss, net |
| 47 |
| 25 |
| 9 |
| 5 |
|
| 32 |
| 47 |
| 6 |
| 9 |
| ||||||||
Prior service cost (credit) |
| — |
| 1 |
| (12 | ) | (9 | ) |
| — |
| — |
| (11 | ) | (12 | ) | ||||||||
Total cost |
| 79 |
| 56 |
| 11 |
| 11 |
|
| 31 |
| 79 |
| 5 |
| 11 |
| ||||||||
Less: Discontinued operations |
| 1 |
| 4 |
| — |
| — |
|
| — |
| 1 |
| — |
| — |
| ||||||||
Net cost — continuing operations |
| $ | 78 |
| $ | 52 |
| $ | 11 |
| $ | 11 |
|
| $ | 31 |
| $ | 78 |
| $ | 5 |
| $ | 11 |
|
Abbott funds its domestic defined benefit plans according to IRS funding limitations. International pension plans are funded according to similar regulations. In the first quarters of 2016 and 2015, and 2014, $529$491 million and $312$529 million, respectively, were contributed to defined benefit plans and $24$9 million and $40$24 million, respectively, were contributed to the post-employment medical and dental benefit plans.
Note 12 — Taxes on Earnings
Taxes on earnings from continuing operations reflect the estimated annual effective rates and include charges for interest and penalties. In the first quarter of 2015 and 2014,2016, taxes on earnings from continuing operations were not affected by any adjustmentsincludes the impact of a net tax benefit of approximately $140 million as thea result of the resolution of various tax positions pertainingfrom prior years, partially offset by the unfavorable impact of non-deductible foreign exchange losses related to Venezuela. Earnings from discontinued operations, net of tax, in the first quarter of 2016 reflects the recognition of $247 million of net tax benefits primarily as a result of the resolution of various tax positions related to prior years. TaxThe conclusion of these tax matters decreased the gross amount of unrecognized tax benefits by approximately $444 million. In the first quarter of 2015, tax expense related to discontinued operations includes $665 million of tax expense on certain current-year funds earned outside the U. S.U.S. that were not designated as permanently reinvested overseas. Earnings from discontinued operations, net of tax, in the first quarter of 2015 also reflects the recognition of $13 million of net tax benefits primarily as a result of the resolution of various tax positions related to AbbVie’s operations for years prior to the separation. The conclusion of these tax matters decreased the gross amount of unrecognized tax benefits by approximately $16 million. Earnings from discontinued operations, net of tax, in the first quarter of 2014 reflects the recognition of $107 million of net tax benefits primarily as a result of the resolution of various tax positions related to the developed markets branded generics pharmaceuticals business, as well as AbbVie’s operations, for years prior to the separation. The conclusion of these tax matters decreased the gross amount of unrecognized tax benefits by approximately $102 million.
Tax authorities in various jurisdictions regularly review Abbott’s income tax filings. Abbott believes that it is reasonably possible that the recorded amount of gross unrecognized tax benefits may decrease by $525$100 million to $635$200 million, including cash adjustments, within the next twelve months as a result of concluding various domestic and international tax matters. In the U.S., Abbott’s federal income tax returns through 20112012 are settled except for two issues.one issue.
Note 13 — Segment Information
Abbott’s principal business is the discovery, development, manufacture and sale of a broad line of health care products. Abbott’s products are generally sold directly to retailers, wholesalers, hospitals, health care facilities, laboratories, physicians’ offices and government agencies throughout the world. Abbott’s reportable segments are as follows:
Established Pharmaceutical Products — International sales of a broad line of branded generic pharmaceutical products.
Nutritional Products — Worldwide sales of a broad line of adult and pediatric nutritional products.
Diagnostic Products — Worldwide sales of diagnostic systems and tests for blood banks, hospitals, commercial laboratories and alternate-care testing sites. For segment reporting purposes, the Core Laboratories Diagnostics, Molecular Diagnostics, Point of Care and Ibis diagnostic divisions are aggregated and reported as the Diagnostic Products segment.
Vascular Products — Worldwide sales of coronary, endovascular, structural heart, vessel closure and other medical device products. For segment reporting purposes, the Vascular and Electrophysiology Products divisions are aggregated and reported as the Vascular Products segment.
Non-reportable segments include the Diabetes Care and Medical Optics segments.
On February 27, 2015, Abbott completed the sale of its developed markets branded generics pharmaceuticals business to Mylan N.V. This business was previously included in the Established Pharmaceutical Products segment for the first quarter of 2014; therefore, the 2014 segment information below has been adjusted to reflect the classification of the developed markets branded generics pharmaceuticals business as part of discontinued operations in the Condensed Consolidated Statement of Earnings.
Abbott’s underlying accounting records are maintained on a legal entity basis for government and public reporting requirements. Segment disclosures are on a performance basis consistent with internal management reporting. Intersegment transfers of inventory are recorded at standard cost and are not a measure of segment operating earnings. The cost of some corporate functions and the cost of certain employee benefits are charged to segments at predetermined rates that approximate cost. Remaining costs, if any, are not allocated to segments. In addition, intangible asset amortization is not allocated to operating segments, and intangible assets and goodwill are not included in the measure of each segment’s assets. The following segment information has been prepared in accordance with the internal accounting policies of Abbott, as described above, and is not presented in accordance with generally accepted accounting principles applied to the consolidated financial statements.
|
| Three Months Ended March 31 |
|
| Three Months Ended March 31 |
| ||||||||||||||||||||
|
| Net Sales to |
| Operating |
|
| Net Sales to |
| Operating |
| ||||||||||||||||
(in millions) |
| 2015 |
| 2014 |
| 2015 |
| 2014 |
|
| 2016 |
| 2015 |
| 2016 |
| 2015 |
| ||||||||
Established Pharmaceutical Products |
| $ | 897 |
| $ | 681 |
| $ | 167 |
| $ | 121 |
|
| $ | 888 |
| $ | 897 |
| $ | 148 |
| $ | 167 |
|
Nutritional Products |
| 1,669 |
| 1,631 |
| 350 |
| 283 |
|
| 1,671 |
| 1,669 |
| 342 |
| 350 |
| ||||||||
Diagnostic Products |
| 1,093 |
| 1,117 |
| 276 |
| 222 |
|
| 1,118 |
| 1,093 |
| 267 |
| 276 |
| ||||||||
Vascular Products |
| 698 |
| 738 |
| 284 |
| 221 |
|
| 685 |
| 698 |
| 247 |
| 284 |
| ||||||||
Total Reportable Segments |
| 4,357 |
| 4,167 |
| 1,077 |
| 847 |
|
| 4,362 |
| 4,357 |
| 1,004 |
| 1,077 |
| ||||||||
Other |
| 540 |
| 588 |
|
|
|
|
|
| 523 |
| 540 |
|
|
|
|
| ||||||||
Net Sales |
| $ | 4,897 |
| $ | 4,755 |
|
|
|
|
|
| $ | 4,885 |
| $ | 4,897 |
|
|
|
|
| ||||
Corporate functions and benefit plans costs |
|
|
|
|
| (117 | ) | (58 | ) |
|
|
|
|
| (81 | ) | (117 | ) | ||||||||
Non-reportable segments |
|
|
|
|
| 55 |
| 66 |
|
|
|
|
|
| (2 | ) | 55 |
| ||||||||
Net interest expense |
|
|
|
|
| (16 | ) | (20 | ) |
|
|
|
|
| (25 | ) | (16 | ) | ||||||||
Share-based compensation (a) |
|
|
|
|
| (148 | ) | (116 | ) |
|
|
|
|
| (152 | ) | (148 | ) | ||||||||
Amortization of intangible assets |
|
|
|
|
| (156 | ) | (127 | ) |
|
|
|
|
| (144 | ) | (156 | ) | ||||||||
Other, net (b) |
|
|
|
|
| (42 | ) | (251 | ) |
|
|
|
|
| (598 | ) | (42 | ) | ||||||||
Earnings from continuing operations before taxes |
|
|
|
|
| $ | 653 |
| $ | 341 |
|
|
|
|
|
| $ | 2 |
| $ | 653 |
|
(a) Approximately 40 to 4550 percent of the annual net cost of share-based awards will typically be recognized in the first quarter due to the timing of the granting of share-based awards.
(b) The decrease from 2014increase in Other, net was primarily driven by the $477 million foreign currency loss related to 2015 primarily reflects lower charges for cost reduction initiatives.
Tableoperations in Venezuela and the $43 million impairment of Contentsan in-process research and development project related to a non-reportable segment.
Note 14 — Subsequent Event
On April 27, 2016, Abbott entered into a definitive agreement to acquire St. Jude Medical, Inc. (St. Jude Medical). With 2015 sales of approximately $5.5 billion, St. Jude Medical is a global medical device manufacturer. The acquisition, which is expected to significantly advance Abbott’s global cardiovascular device presence and leadership, is subject to the approval of St. Jude Medical shareholders and the satisfaction of customary closing conditions, including applicable regulatory approvals. Under the terms of the agreement, for each share of stock, St. Jude Medical shareholders will receive $46.75 in cash and 0.8708 of a share of Abbott common stock. At an Abbott stock price of $43.93, which reflects the five-day volume weighted average price ending on April 26, 2016, this represents a value of $85 per common share at a total expected equity value of $25 billion. St. Jude Medical’s net debt of approximately $5.7 billion will be assumed or refinanced by Abbott. In April 2015,2016, Abbott sold 40.3 million of the 110 million ordinary shares of Mylan N.V. received in the sale of the developed markets branded generics pharmaceuticals businessobtained a commitment for a 364-day senior unsecured bridge term loan facility for an amount not to Mylan. In the second quarter of 2015, Abbott will record a pretax gain of $206 million on $2.29exceed $17.2 billion in net proceeds fromconjunction with its pending acquisition of St. Jude Medical. While Abbott plans to fund the salecash portion of these shares.this transaction with anticipated medium and long-term borrowings, the bridge facility will provide back-up financing.
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Financial Review - Results of Operations
In February 2015 Abbott completedAbbott’s revenues are derived primarily from the sale of its developed marketsa broad line of health care products under short-term receivable arrangements. Patent protection and licenses, technological and performance features, and inclusion of Abbott’s products under a contract most impact which products are sold; price controls, competition and rebates most impact the net selling prices of products; and foreign currency translation impacts the measurement of net sales and costs. Abbott’s primary products are nutritional products, branded genericsgeneric pharmaceuticals, business to Mylan Inc. Abbott retained its branded generics pharmaceuticals business in emerging markets. In February 2015 Abbott also completed the sale of its animal health business to Zoetis Inc. The results of these businesses prior to the date of sale have been excluded from continuing operationsdiagnostic testing products and are reported as part of discontinued operations in the Condensed Consolidated Statement of Earnings.vascular products.
The following table details sales by reportable segment for the three months ended March 31. Percent changes are versus the prior year and are based on unrounded numbers.
|
| Net Sales to External Customers |
|
| Net Sales to External Customers |
| ||||||||||||||||||||
(in millions) |
| March 31, |
| March 31, |
| Total |
| Impact of |
| Total Change |
|
| March 31, |
| March 31, |
| Total |
| Impact of |
| Total Change |
| ||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Established Pharmaceutical Products |
| $ | 897 |
| $ | 681 |
| 31.8 | % | (11.2 | )% | 43.0 | % |
| $ | 888 |
| $ | 897 |
| (1.0 | )% | (12.0 | )% | 11.0 | % |
Nutritional Products |
| 1,669 |
| 1,631 |
| 2.3 |
| (4.0 | ) | 6.3 |
|
| 1,671 |
| 1,669 |
| 0.1 |
| (4.2 | ) | 4.3 |
| ||||
Diagnostic Products |
| 1,093 |
| 1,117 |
| (2.1 | ) | (8.1 | ) | 6.0 |
|
| 1,118 |
| 1,093 |
| 2.3 |
| (4.6 | ) | 6.9 |
| ||||
Vascular Products |
| 698 |
| 738 |
| (5.4 | ) | (7.5 | ) | 2.1 |
|
| 685 |
| 698 |
| (1.9 | ) | (2.8 | ) | 0.9 |
| ||||
Total Reportable Segments |
| 4,357 |
| 4,167 |
| 4.6 |
| (6.9 | ) | 11.5 |
|
| 4,362 |
| 4,357 |
| 0.1 |
| (5.7 | ) | 5.8 |
| ||||
Other |
| 540 |
| 588 |
| (8.2 | ) | (7.7 | ) | (0.5 | ) |
| 523 |
| 540 |
| (3.1 | ) | (3.0 | ) | (0.1 | ) | ||||
Net Sales from Continuing Operations |
| $ | 4,897 |
| $ | 4,755 |
| 3.0 |
| (7.0 | ) | 10.0 |
|
| $ | 4,885 |
| $ | 4,897 |
| (0.2 | ) | (5.3 | ) | 5.1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Total U.S. |
| $ | 1,502 |
| $ | 1,474 |
| 1.9 |
| — |
| 1.9 |
|
| $ | 1,531 |
| $ | 1,502 |
| 1.9 |
| — |
| 1.9 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Total International |
| $ | 3,395 |
| $ | 3,281 |
| 3.5 |
| (10.1 | ) | 13.6 |
|
| $ | 3,354 |
| $ | 3,395 |
| (1.2 | ) | (7.8 | ) | 6.6 |
|
The netNet sales growth of 3% in 20152016 was negatively impacted by changes in foreign currency exchange rates. The relatively stronger U.S. dollar decreased total international sales by 10.17.8 percent and total sales by 7.05.3 percent. Excluding the unfavorable impact of foreign exchange, and including the impact of the 2014 acquisitions of CFR Pharmaceuticals and Veropharm, total net sales increased 10.05.1 percent in 2015,2016, driven by higher revenues in the Established Pharmaceutical, Nutritional and Diagnostic Products segments. Double-digitHigh single digit growth in emerging market sales was a significant contributorcontributed to the 13.66.6 percent increase in total international sales excluding the impact of foreign exchange for the first quarter of 2015.2016.
The table below provides detail by sales category for the three months ended March 31. Percent changes are versus the prior year and are based on unrounded numbers.
(in millions) |
| March 31, |
| March 31, |
| Total |
| Impact of |
| Total Change |
|
| March 31, |
| March 31, |
| Total |
| Impact of |
| Total Change |
| ||||
Established Pharmaceutical Products — |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Key Emerging Markets |
| $ | 653 |
| $ | 496 |
| 31.8 | % | (13.0 | )% | 44.8 | % |
| $ | 634 |
| $ | 655 |
| (3.2 | )% | (15.1 | )% | 11.9 | % |
Other Emerging Markets |
| 244 |
| 185 |
| 31.6 |
| (6.4 | ) | 38.0 |
|
| 254 |
| 242 |
| 4.9 |
| (3.7 | ) | 8.6 |
| ||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Nutritionals — |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
International Pediatric Nutritionals |
| 564 |
| 577 |
| (2.3 | ) | (6.4 | ) | 4.1 |
| |||||||||||||||
U.S. Pediatric Nutritionals |
| 385 |
| 368 |
| 4.5 |
| — |
| 4.5 |
|
| 403 |
| 385 |
| 4.7 |
| — |
| 4.7 |
| ||||
International Pediatric Nutritionals |
| 577 |
| 545 |
| 6.0 |
| (5.7 | ) | 11.7 |
| |||||||||||||||
International Adult Nutritionals |
| 388 |
| 407 |
| (4.6 | ) | (8.2 | ) | 3.6 |
| |||||||||||||||
U.S. Adult Nutritionals |
| 300 |
| 321 |
| (6.5 | ) | — |
| (6.5 | ) |
| 316 |
| 300 |
| 5.2 |
| — |
| 5.2 |
| ||||
International Adult Nutritionals |
| 407 |
| 397 |
| 2.4 |
| (8.4 | ) | 10.8 |
| |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Diagnostics — |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Immunochemistry |
| 821 |
| 856 |
| (4.1 | ) | (9.0 | ) | 4.9 |
|
| 847 |
| 821 |
| 3.1 |
| (5.2 | ) | 8.3 |
| ||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Vascular Products (1) — |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Drug Eluting Stents (DES) and Bioresorbable Vascular Scaffold (BVS) products |
| 332 |
| 368 |
| (10.0 | ) | (7.2 | ) | (2.8 | ) | |||||||||||||||
Other Coronary products |
| 133 |
| 145 |
| (8.3 | ) | (7.8 | ) | (0.5 | ) | |||||||||||||||
Coronary Devices |
| 530 |
| 541 |
| (2.0 | ) | (2.9 | ) | 0.9 |
| |||||||||||||||
Endovascular |
| 125 |
| 121 |
| 3.0 |
| (6.8 | ) | 9.8 |
|
| 133 |
| 125 |
| 6.4 |
| (2.6 | ) | 9.0 |
|
(1) Other Coronary ProductsDevices include primarilyDES/BVS product portfolio, structural heart, guidewires, balloon catheters, and balloon catheters.other coronary products. Endovascular includes vessel closure, carotid stents and other peripheral products.
Key Emerging Markets for the Established Pharmaceutical Products business include India, Russia, China, Brazil and Colombia,China, along with several other markets that represent the most attractive long-term growth opportunities for Abbott’s branded generics product portfolio. Excluding the unfavorable effect of foreign exchange, sales in the Key Emerging Markets increased 44.811.9 percent compared to the first quarter of 2014. Excluding the impact2015 due to continued double-digit growth in India and above-market growth in China and several countries in Latin America. India comprises more than 20 percent of the 2014 acquisitions of CFR Pharmaceuticals and Veropharm and the effect of foreign exchange, sales in the Key Emerging Markets for Established Pharmaceuticals increased in the low double digits.Pharmaceutical Product sales.
Excluding the effect of foreign exchange, the 11.74.1 percent increase in International Pediatric Nutritional sales was primarily driven by double-digitmarket share expansion of the Eleva™ product in the premium segment of the Chinese infant formula market and continued growth in ChinaRussia and across several countries in Latin America as a result of recently launched infant formula products and anAmerica. In the U.S., the 4.7 percent increase in market share.Pediatric Nutritional sales reflects recent infant and toddler product launches including Similac® Advance® Non-GMO and Go & Grow® by Similac® Non-GMO. Excluding the effect of foreign exchange, the 10.83.6 percent increase in International Adult Nutritional sales reflects double-digitcontinued strong growth of Ensure® and Glucerna® in Latin America and continued expansion ofother emerging markets. In the adult nutrition category internationally. The 6.5U.S., the 5.2 percent decreaseincrease in U.S. Adult Nutritional sales reflects weaknesswas driven by the growth of Ensure® in the retail and institutional categories due to the negative effects of increased competition and market dynamics.segments.
Excluding the effect of foreign exchange, the 6.9 percent increase in Diagnostics sales was primarily driven by share gains in the Core Laboratory and Point of Care markets in the U.S. and internationally, including double-digit growth for Core Laboratory in emerging markets. In the Vascular Products segment, double digit growth in sales of Abbott’s MitraClip® structural heart device for the treatment of mitral regurgitation was partially offset by lower sales of DES products declined due primarily to continued pricing pressures.products. The increase in the Endovascular business was driven by higher Supera® and vessel closure sales.
The gross profit margin percentage was 53.2 percent for the first quarter 2016 compared to 54.3 percent for the first quarter 2015 compared to 49.5 percent for the first quarter 2014.2015. The increasedecrease primarily reflects the impact of gross margin initiatives across Abbott’s businesses and, in part, the comparison to an unusually low ratio experienced in the first quarter of 2014 due to the impact of unfavorable foreign exchange in the diagnostics, established pharmaceuticalsnutritional, diagnostic, and nutritionalvascular businesses.
Research and development expenses decreasedincreased by $56$66 million, or 15.021.0 percent, in the first quarter 2015of 2016 due primarily to the impactimpairment of higher restructuring costs recorded in the first quarter of 2014 than the first quarter of 2015.an in-process research and development asset related to a non-reportable segment. For the three months ended March 31, 2015,2016, research and development expenditures totaled $58$61 million for the Vascular Products segment, $98$120 million for the Diagnostic Products segment, $34$31 million for the Established Pharmaceutical Products segment and $50$51 million for the Nutritional Products segment.
Selling, general and administrative expenses for the first quarter of 2015 increased 7.22016 decreased 2.3 percent due primarily to the impact of cost improvement initiatives and the acquisitionfavorable impact of CFR Pharmaceuticals in the third quarter of 2014 and Veropharm in the fourth quarter of 2014.foreign exchange.
Business Acquisitions
In September 2014,August 2015, Abbott completed the acquisition of the controlling interest in CFR Pharmaceuticals S.A. (CFR)equity of Tendyne Holdings, Inc. (Tendyne) that Abbott did not already own for approximately $2.9 billion in cash ($2.8 billion net of CFR cash on hand at closing). Including the assumption of approximately $570 million of debt, the total cost of the acquisition was $3.4 billion. The acquisition of CFR more than doubles Abbott’s branded generics pharmaceutical presence in Latin America and further expands its presence in emerging markets. CFR’s financial results are included in Abbott’s financial statements beginning on September 26, 2014, the date that Abbott acquired control of this business. Abbott owns 99.9% of the outstanding ordinary shares of CFR. The fair value of the non-controlling interest at the acquisition date was approximately $3 million. The acquisition was funded with cash and cash equivalents and short-term investments. The preliminary allocation of the fair value of the acquisition is shown in the table below. The allocation of the fair value of the acquisition will be finalized when the valuation is completed.
(in billions) |
|
|
| |
Acquired intangible assets, non-deductible |
| $ | 1.80 |
|
Goodwill, non-deductible |
| 1.60 |
| |
Acquired net tangible assets |
| 0.06 |
| |
Deferred income taxes recorded at acquisition |
| (0.54 | ) | |
Total preliminary allocation of fair value |
| $ | 2.92 |
|
Acquired intangible assets consist primarily of product rights for currently marketed products and are amortized over 12 to 16 years (average of 15 years). The goodwill is primarily attributable to intangible assets that do not qualify for separate recognition. The goodwill is identifiable to the Established Pharmaceutical Products segment. The acquired tangible assets consist primarily of cash and cash equivalents of approximately $94 million, trade accounts receivable of approximately $179 million, inventory of approximately $169 million, other current assets of approximately $51 million, property and equipment of approximately $209 million, and other long-
term assets of approximately $138 million. Assumed liabilities consist of borrowings of approximately $570 million, trade accounts payable and other current liabilities of approximately $195 million and other noncurrent liabilities of approximately $15 million.
Annualized net sales for CFR Pharmaceuticals are expected to total approximately $800 million. Had the acquisition of CFR Pharmaceuticals taken place on January 1, 2013, the consolidated net sales and earnings of Abbott would not have been significantly different from the reported amounts.
In December 2014, Abbott acquired control of Veropharm, a leading Russian pharmaceutical company for approximately $315 million excluding assumed debt. Through this acquisition, Abbott establishes a manufacturing footprint in Russia and obtains a portfolio of medicines that is well aligned with Abbott’s current pharmaceutical therapeutic areas of focus. Abbott acquired control of Veropharm through its purchase of Limited Liability Company Garden Hills, the holding company that owns approximately 98 percent of Veropharm. Including the assumption of approximately $90 million of debt and a minority interest with a fair value of $5 million, the total value of the acquired business was approximately $410 million. The preliminary allocation of the fair value of the acquisition resulted in definite-lived non-deductible intangible assets of approximately $100 million, non-deductible goodwill of approximately $110 million, and net deferred tax liabilities of approximately $35 million. Non-deductible goodwill is identifiable with the Established Pharmaceutical Products segment. Additionally, Abbott acquired property, plant, and equipment of approximately $170 million, accounts receivable of approximately $45 million, inventory of approximately $25 million, and net other liabilities of approximately $5 million. Acquired intangible assets consist of developed technology and are being amortized over 16 years.
In December 2014, Abbott completed the acquisition of Topera, Inc. for approximately $250$225 million in cash plus additional payments up to $300$150 million to be made upon completion of certain regulatory and sales milestones. The acquisition of Topera providesTendyne, which is focused on developing minimally invasive mitral valve replacement therapies, allows Abbott a foundational entryto broaden its foundation in the electrophysiology market.treatment of mitral valve disease. The finalpreliminary allocation of the fair value of the acquisition resulted in non-deductible acquired in-process research and development of approximately $20$220 million, which is accounted for as an indefinite-lived intangible asset until regulatory approval or discontinuation, non-deductible definite-lived intangiblesgoodwill of approximately $142 million, other assets of approximately $325 million, non-deductible goodwill of approximately $175$13 million, net deferred tax liabilities of approximately $105$80 million, and contingent consideration of approximately $165$70 million. The fair value of the contingent consideration was determined based on an independent appraisal. Acquired intangible assets consist of developed technology and trademarks, and are being amortized over 16 years.
The preliminary allocations of the fair value of CFR Pharmaceuticals and Veropharmthis acquisition will be finalized when valuations arethe valuation is completed.
Had the aggregatethis acquisition taken place as of the above acquisitions taken place on January 1, 2013,beginning of the comparable prior annual reporting period, consolidated net sales and earnings would not have been significantly different from reported amounts.
On January 30, 2016, Abbott entered into a definitive agreement to acquire Alere Inc. (Alere). With annual sales of approximately $2.5 billion, Alere is a global leader in point of care diagnostics. The acquisition, which is expected to significantly advance Abbott’s global diagnostics presence and leadership, is subject to the approval of Alere shareholders and the satisfaction of customary closing conditions, including applicable regulatory approvals. On March 15, 2016, Alere filed a Form 8-K stating that it will not be able to file its 2015 Form 10-K until it completes its analysis of the timing of revenue recognition in Africa and China. In its Form 8-K, Alere also stated that it does not expect to mail a definitive proxy statement related to obtaining the Alere shareholders’ approval of the acquisition by Abbott until after Alere files its 2015 Form 10-K. On May 2, 2016, Abbott and Alere received a request for additional information from the United States Federal Trade Commission (FTC) relating to Abbott’s potential acquisition of Alere. The effect of this request, which was issued under the Hart-Scott Rodino (HSR) Antitrust Improvements Act of 1976, as amended, is to extend the waiting period imposed by the HSR Act until 30 days after Abbott and Alere have substantially complied with this request, unless the period is extended voluntarily by the parties or terminated sooner by the FTC.
Under the terms of the agreement, Abbott will pay $56 per common share at a total expected equity value of $5.8 billion. Alere’s 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 acquisition 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.
On April 27, 2016, Abbott entered into a definitive agreement to acquire St. Jude Medical, Inc. (St. Jude Medical). With 2015 sales of approximately $5.5 billion, St. Jude Medical is a global medical device manufacturer. The acquisition, which is expected to significantly advance Abbott’s global cardiovascular device presence and leadership, is subject to the approval of St. Jude Medical shareholders and the satisfaction of customary closing conditions, including applicable regulatory approvals. Under the terms of the agreement, for each share of stock, St. Jude Medical shareholders will receive $46.75 in cash and 0.8708 of a share of Abbott common stock. At an Abbott stock price of $43.93, which reflects the five-day volume weighted average price ending on April 26, 2016, this represents a value of $85 per common share at a total expected equity value of $25 billion. St. Jude Medical’s net debt of approximately $5.7 billion will be assumed or refinanced by Abbott. In April 2016, Abbott obtained a commitment for a 364-day senior unsecured bridge term loan facility for an amount not to exceed $17.2 billion in conjunction with its pending acquisition of St. Jude Medical. While Abbott plans to fund the cash portion of this transaction with anticipated medium and long-term borrowings, the bridge facility will provide back-up financing.
Restructuring Plans
The results for the first three months of 20152016 reflect charges recognized for actions associated with the company’s plans to streamline various operations in order to reduce costs and improve efficiencies. Abbott recorded employee related severance and other charges of approximately $8$16 million in 2015the first three months of 2016 related to these initiatives. Approximately $1 million is recognized in Cost of products sold and approximately $7$15 million is recognized in Selling, general and administrative expense. See Note 7 to the financial statements, “Restructuring Plans,” for additional information regarding these charges.
Interest Expense (Income), net
Interest expense (income), net decreased $4increased $9 million in the first quarter 2015of 2016 compared to 20142015 due to higher interest incomeexpense in 2016 associated with the first quarterlong-term debt issued in March of 2015 due to aas well as higher rate of returninterest rates on short-term investments.borrowings.
Taxes on Earnings from Continuing Operations
Taxes on earnings from continuing operations reflect the estimated annual effective rates and include charges for interest and penalties. In the first quarter of 2015 and 2014,2016, taxes on earnings from continuing operations were not affected by any adjustmentsincludes the impact of a net tax benefit of approximately $140 million as thea result of the resolution of various tax positions pertainingfrom prior years, partially offset by the unfavorable impact of non-deductible foreign exchange losses related to Venezuela. Earnings from discontinued operations, net of tax, in the first quarter of 2016 reflects the recognition of $247 million of net tax benefits primarily as a result of the resolution of various tax positions related to prior years. The change inconclusion of these tax matters decreased the effective rate from 2014 togross amount of unrecognized tax benefits by approximately $444 million. In the first quarter of 2015, primarily reflects the impact of the repatriation of 2014 earnings generated outside the U.S. on the 2014 tax rate. Tax expense related to discontinued operations includes $665 million of tax expense on certain current-year funds earned outside the U.S. that were not designated as permanently reinvested overseas. Earnings from discontinued operations, net of tax, in the first quarter of 2015 also reflects the recognition of $13 million of net tax benefits primarily as a result of the resolution of various tax positions related to AbbVie’s operations for years prior to the separation. The conclusion of these tax matters decreased the gross amount of unrecognized tax benefits by approximately $16 million. Earnings from discontinued operations, net of tax, in the first quarter of 2014 reflects the
recognition of $107 million of net tax benefits primarily as a result of the resolution of various tax positions related to the developed markets branded generics pharmaceuticals business, as well as AbbVie’s operations, for years prior to the separation. The conclusion of these tax matters decreased the gross amount of unrecognized tax benefits by approximately $102 million.
Tax authorities in various jurisdictions regularly review Abbott’s income tax filings. Abbott believes that it is reasonably possible that the recorded amount of gross unrecognized tax benefits may decrease by $525$100 million to $635$200 million, including cash adjustments, within the next twelve months as a result of concluding various domestic and international tax matters. In the U.S., Abbott’s federal income tax returns through 20112012 are settled except for two issues.one issue.
Separation of AbbVie Inc.
On January 1, 2013, Abbott completed the separation of AbbVie Inc. (AbbVie), which was formed to hold Abbott’s research-based proprietary pharmaceuticals business. For a small portion of AbbVie’s operations, the legal transfer of AbbVie’s assets (net of liabilities) did not occur with the separation of AbbVie on January 1, 2013 due to the time required to transfer marketing authorizations and other regulatory requirements in each of these countries. Under the terms of the separation agreement with Abbott, AbbVie is subject to the risks and entitled to the benefits generated by these operations and assets. The majority of these operations were transferred to AbbVie in 2013 and 2014. These assets and liabilities have been presented as held for disposition in the Condensed Consolidated Balance Sheet. Abbott has recorded a prepaid asset of $164$282 million for its obligation to transfer these net liabilities held for disposition to AbbVie.
Abbott has retained all liabilities for all U.S. federal and foreign income taxes on income prior to the separation, as well as certain non-income taxes attributable to AbbVie’s business.business prior to the separation. AbbVie generally will be liable for all other taxes attributable to its business. EarningsNet earnings from discontinued operations reflect the recognition of a net tax benefit of $244 million and $13 million in the first quarter of 2016 and 2015, and 2014 reflect the recognition of $13 million and $36 million, respectively, of net tax benefits primarily as a result of the resolution of various tax positions related to AbbVie’s operations for years prior to the separation.
Discontinued Operations
As a result of the disposition of Abbott’s developed markets branded generics pharmaceuticals and animal health businesses, the current and prior yearyears’ operating results of these businesses up to the date of sale are reported as part of discontinued operations on the Earnings from discontinued operations, net of tax line in the Condensed Consolidated Statement of Earnings. Discontinued operations include an allocationThe cash flows associated with the developed markets branded generics pharmaceuticals and animal health businesses are included in Abbott’s Condensed Consolidated Statement of interest expense assuming a uniform ratioCash Flows up to the date of consolidated debt to equity for all of Abbott’s historical operations.disposition.
The operating results of Abbott’s developed markets branded generics pharmaceuticals, animal health and AbbVie businesses, which are being reported as discontinued operations are as follows:
|
| Three Months Ended |
|
| Three Months Ended |
| ||||||||
(in millions) |
| 2015 |
| 2014 |
|
| 2016 |
| 2015 |
| ||||
Net Sales |
|
|
|
|
|
|
|
|
|
| ||||
Developed markets generics pharmaceuticals and animal health businesses |
| $ | 256 |
| $ | 489 |
|
| $ | — |
| $ | 256 |
|
AbbVie |
| — |
| — |
|
| — |
| — |
| ||||
Total |
| $ | 256 |
| $ | 489 |
|
| $ | — |
| $ | 256 |
|
Earnings Before Tax |
|
|
|
|
| |||||||||
Earnings (Loss) Before Tax |
|
|
|
|
| |||||||||
Developed markets generics pharmaceuticals and animal health businesses |
| $ | 25 |
| $ | 82 |
|
| $ | (3 | ) | $ | 25 |
|
AbbVie |
| — |
| — |
|
| — |
| — |
| ||||
Total |
| $ | 25 |
| $ | 82 |
|
| $ | (3 | ) | $ | 25 |
|
Income Tax Expense (Benefit) |
|
|
|
|
|
|
|
|
|
| ||||
Developed markets generics pharmaceuticals and animal health businesses |
| $ | 12 |
| $ | (33 | ) |
| $ | (3 | ) | $ | 12 |
|
AbbVie |
| (13 | ) | (36 | ) |
| (244 | ) | (13 | ) | ||||
Total |
| $ | (1 | ) | $ | (69 | ) |
| $ | (247 | ) | $ | (1 | ) |
Net Earnings |
|
|
|
|
|
|
|
|
|
| ||||
Developed markets generics pharmaceuticals and animal health businesses |
| $ | 13 |
| $ | 115 |
|
| $ | — |
| $ | 13 |
|
AbbVie |
| 13 |
| 36 |
|
| 244 |
| 13 |
| ||||
Total |
| $ | 26 |
| $ | 151 |
|
| $ | 244 |
| $ | 26 |
|
TableIn the first quarter of Contents
2016, Abbott received an additional $25 million of proceeds related to the expiration of a holdback agreement associated with the sale of the animal health business and reported an after-tax gain on the sale in discontinued operations of $16 million. The sale of the developed markets branded generics pharmaceuticals and animal health businesses in the first quarter of 2015 resulted in the recognition of a pretax gain of $2.821 billion, tax expense of $1.084 billion and an after taxafter-tax gain of $1.737 billion.
The assets of the operations held for disposition and the liabilities to be assumed in the disposition related to the businesses noted above, as well as the AbbVie assets and liabilities are classified as held for disposition in the Condensed Consolidated Balance Sheet as of March 31, 20152016 and December 31, 2014. Prior period balance sheets are not adjusted when a business is designated as being held for sale. The cash flows associated with the developed markets branded generics pharmaceuticals and animal health businesses are included in Abbott’s Condensed Consolidated Statement of Cash Flows up2015, relate to the date of disposition.AbbVie businesses. The following is a summary of the assets and liabilities held for disposition:
(in millions) |
| March 31, |
| December 31, |
|
| March 31, |
| December 31, |
| ||||
Trade receivables, net |
| $ | 91 |
| $ | 498 |
| |||||||
Cash and Trade receivables, net |
| $ | 44 |
| $ | 54 |
| |||||||
Total inventories |
| 54 |
| 254 |
|
| 29 |
| 43 |
| ||||
Prepaid expenses, deferred income taxes, and other receivables |
| 28 |
| 140 |
| |||||||||
Prepaid expenses and other receivables |
| 3 |
| 8 |
| |||||||||
Current assets held for disposition |
| 173 |
| 892 |
|
| 76 |
| 105 |
| ||||
Net property and equipment |
| 2 |
| 125 |
|
| 2 |
| 1 |
| ||||
Intangible assets, net of amortization |
| — |
| 804 |
| |||||||||
Goodwill |
| — |
| 950 |
| |||||||||
Deferred income taxes and other assets |
| 1 |
| 55 |
|
| — |
| 1 |
| ||||
Non-current assets held for disposition |
| 3 |
| 1,934 |
|
| 2 |
| 2 |
| ||||
Total assets held for disposition |
| $ | 176 |
| $ | 2,826 |
|
| $ | 78 |
| $ | 107 |
|
|
|
|
|
|
|
|
|
|
|
| ||||
Trade accounts payable |
| $ | 286 |
| $ | 423 |
|
| $ | 357 |
| $ | 359 |
|
Salaries, wages, commissions and other accrued liabilities |
| 15 |
| 257 |
|
| 3 |
| 14 |
| ||||
Current liabilities held for disposition |
| 301 |
| 680 |
|
| 360 |
| 373 |
| ||||
Post-employment obligations, deferred income taxes and other long-term liabilities |
| — |
| 108 |
|
| — |
| — |
| ||||
Total liabilities held for disposition |
| $ | 301 |
| $ | 788 |
|
| $ | 360 |
| $ | 373 |
|
Liquidity and Capital Resources March 31, 20152016 Compared with December 31, 20142015
The reduction of cash and cash equivalents from $4.1$5.0 billion at December 31, 20142015 to $3.2$3.3 billion at March 31, 20152016 reflects repayment of short-term debt, pension contributions, share repurchases and the Venezuela foreign currency loss, as well as dividends paid in the quarter.
Net cash fromused in operating activities for the first three months of 20152016 totaled $2$93 million. Other, net in Net cash used in operating activities for the first three months of 2016 of $1.3 billion includes contributions to defined benefit pension plans of $491 million as well as approximately $125 million of cash taxes paid related to the disposition of businesses. Other, net also includes the non-cash impact of approximately $390 million of net tax benefits primarily associated with the resolution of various tax positions from prior years. In the first three months of 2015, Other, net in Net cash from operating activities for the first three months of 2015 of $230 million reflects the non-cash impact of approximately $1.1 billion of tax expense associated with the gain on the sale of businesses. Other, net cash from operating activities also includesincluded the contributions to defined benefit pension plans of $529 million, in 2015, as well as approximately $55 million related to cost reduction and business disposal activities. Other, net in Net cash from operating activities for the first three months of 2014 of $(548) million reflects contributions to defined benefit pension plans of $312 million in 2014, as well asalso included the non-cash impact of $1.1 billion of tax expense associated with the gain on the sale of businesses. The foreign currency loss related to Venezuela in the first quarter of 2016 reduced Abbott’s cash by approximately $110$405 million and is shown on the Effect of tax benefits fromexchange rate changes on cash and cash equivalents line within the resolutionCondensed Consolidated Statement of various tax positions pertaining to prior years.Cash Flows. Abbott expects to fund cash dividends, capital expenditures and its other investments in its businesses with cash flow from operating activities, cash on hand, short-term investments and borrowings.
Working capital was $10.8$4.0 billion at March 31, 20152016 and $4.7$5.0 billion at December 31, 2014.2015. The $6.1$1.0 billion increasedecrease in working capital in 20152016 is primarily reflectsdue to the $6.0 billion of Mylan N.V. ordinary shares heldreduction in Cash and cash equivalents and Short-term investments driven by Abbott at March 31, 2015. Abbott receivedpension contributions, share repurchases, the shares in the sale of Abbott’s developed markets branded generics pharmaceuticals business to Mylan in the first quarter of 2015.Venezuela foreign currency loss and dividends paid.
A majority of Abbott’s trade receivables in Italy, Spain, Portugal, and Greece are with governmental health systems. Governmental receivables in these four countries accounted for approximatelyless than 1% of Abbott’s total assets and 8% of total net trade receivables as of March 31, 20152016 as compared to approximatelyless than 1% of total assets and 9%7% of total net receivables as of December 31, 2014.2015. With the exception of Greece, Abbott historically has collected almost all of the outstanding receivables in these countries. Abbott closely monitors economic conditions and budgetary and other fiscal developments in these countries. Abbott regularly communicates with its customers regarding the status of receivable balances, including their payment plans and obtains positive confirmation of the validity of the receivables. Abbott also monitors the potential for and periodically has utilized factoring arrangements to mitigate risk although such arrangements were not material in the first three months of 2015.
Table of Contents2016.
Since January 2010, Venezuela has been designated as a highly inflationary economy under U.S. GAAP. In 2014 and in the first quarter of 2015, the government of Venezuela operated multiple mechanisms to exchange bolivars into U.S. dollars. InThese mechanisms included the first quarter ofCENCOEX, SICAD, and SIMADI rates, which stood at 6.3, 13.5, and approximately 200, respectively, at December 31, 2015. In 2015, Abbott continued to use the officialCENCOEX rate of 6.3 Venezuelan bolivars to the U.S. dollar to report the results, financial position, and cash flows related to its operations in Venezuela since Abbott continued to qualify for this exchange rate to pay for the import of various products into Venezuela. Abbott cannot predict whether there will be a devaluation of
On February 17, 2016, the Venezuelan bolivar or whether it will continuegovernment announced that the three-tier exchange rate system would be reduced to be abletwo rates renamed the DIPRO and DICOM rates. The DIPRO rate is the official rate for food and medicine imports and was adjusted from 6.3 to exchange10 bolivars per U.S. dollar. The DICOM rate is a floating market rate published daily by the Venezuelan central bank, which at the 6.3 rate. Asend of March 31, 2015, Abbott had net monetary assets that are subject to revaluation in Venezuela of approximately $345 million. In the first quarter of 2015, revenue from2016 was approximately 263 bolivars per U.S. dollar. As a result of decreasing government approvals to convert bolivars to U.S. dollars to pay for intercompany accounts, as well as the accelerating deterioration of economic conditions in the country, Abbott concluded that it was appropriate to move to the DICOM rate at the end of the first quarter of 2016. As a result, Abbott recorded a foreign currency loss of $477 million in the first quarter of 2016 to revalue its net monetary assets in Venezuela. Abbott expects to use the DICOM rate for the remainder of 2016 to report the results of operations inand to remeasure net monetary assets for Venezuela at the end of each quarter. After the revaluation, as of March 31, 2016, Abbott’s Venezuelan operations represented approximately 3%0.1% of Abbott’s total net sales.consolidated assets and any additional foreign currency losses related to Venezuela are not expected to be material.
At March 31, 20152016, Abbott’s long-term debt rating was A+ by Standard & Poor’s Corporation and A2 by Moody’s Investors Service. As a result of Abbott’s announced agreements to acquire Alere and St. Jude Medical, Abbott’s credit ratings are under review and it is anticipated that the ratings will be adjusted to reflect the increased borrowings that will be incurred to finance these acquisitions. Abbott expects to maintain an investment grade rating. Abbott has readily available financial resources, including unused lines of credit of $5.0 billion that support commercial paper borrowing arrangements which expire in 2019.
Under a registration statement filed with the Securities and Exchange Commission in March 2015, Abbott issued $2.5 billion of long-term debt in the first quarter of 2015 that matures in 2020, 2022 and 2025 with fixed interest rates of 2.0 percent, 2.55 percent, and 2.95 percent, respectively. Proceeds from this debt were used to pay down short-term borrowings. Abbott also entered into interest rate swap contracts totaling $2.5 billion. These contracts have the effect of changing Abbott’s obligation from a fixed interest rate to a variable interest rate obligation.
In September 2014, the board of directors authorized the repurchase of up to $3.0 billion of Abbott’s common shares from time to time, whichtime. The 2014 authorization was in addition to the $512 million unused portion of a previous program announced in June 2013. In the first three months of 2016, Abbott repurchased 10.4 million shares at a cost of $408 million under the program authorized in 2014. In the first three months of 2015, Abbott repurchased 11.3 million shares at a cost of $512 million under the unused portion of the 2013 authorization and 15.6 million shares at a cost of $738 million under the program authorized in 2014 for a total of 26.9 million shares at a cost of $1.25 billion. In
On April 27, 2016, the first three monthsboard of 2014, 54.6directors authorized the issuance and sale for general corporate purposes of up to 75 million common shares were purchased at a costthat would result in proceeds of $2.1 billion under the June 2013 authorization.up to $3 billion.
In the first quarter of 2015,2016, Abbott declared a dividend of $0.24$0.26 per share on its common shares, which represents a 9%an 8% increase over the $0.22$0.24 per share dividend declared in the first quarter of 2014.
In April 2015, Abbott sold 40.3 million of the 110 million Mylan N.V. ordinary shares that it received in the sale of the developed markets branded generics pharmaceuticals business. The sale of these shares generated cash proceeds of $2.29 billion and a pretax gain of $206 million to be recognized in the second quarter of 2015.
Recently Issued Accounting Standards
In May 2014,March 2016, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update No.(ASU) 2016-09, Improvements to Employee Share-Based Payment Accounting. ASU 2016-09 modifies several aspects of the accounting for share-based payment transactions, including the accounting for income taxes and classification on the statement of cash flows. The standard becomes effective for Abbott beginning in the first quarter of 2017 and early adoption is permitted. Abbott does not anticipate that the new guidance will have a material impact on its consolidated financial statements.
In February 2016, the FASB issued ASU 2016-02, Leases, which requires lessees to recognize assets and liabilities for most leases on the balance sheet. The standard becomes effective for Abbott beginning in the first quarter of 2019 and early adoption is permitted. Adoption requires application of the new guidance for all periods presented. Abbott is currently evaluating the impact the new guidance will have on its consolidated financial statements.
In January 2016, the FASB issued ASU 2016-01, Financial Instruments — Recognition and Measurement of Financial Assets and Financial Liabilities, which provides new guidance for the recognition, measurement, presentation, and disclosure of financial assets and liabilities. The standard becomes effective for Abbott beginning in the first quarter of 2018 and early adoption is permitted. Abbott is currently evaluating the effect, if any, that the standard will have on its consolidated financial statements and related disclosures.
In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers, which provides a single comprehensive model for accounting for revenue from contracts with customers and will supersede most existing revenue recognition guidance. Early adoption is not permitted. The standard becomes effective for Abbott in the first quarter of 2018 if the Financial Accounting Standards Board defers the effective date for one year as it has proposed.2018. Abbott is currently evaluating the effect, if any, that the standard will have on its consolidated financial statements and related disclosures.
Legislative Issues
Abbott’s primary markets are highly competitive and subject to substantial government regulations throughout the world. Abbott expects debate to continue over the availability, method of delivery, and payment for health care products and services. It is not possible to predict the extent to which Abbott or the health care industry in general might be adversely affected by these factors in the future. A more complete discussion of these factors is contained in Item 1, Business, and Item 1A, Risk Factors, in the 20142015 Annual Report on Form 10-K.
Private Securities Litigation Reform Act of 1995 — A Caution Concerning Forward-Looking Statements
Under the safe harbor provisions of the Private Securities Litigation Reform Act of 1995, Abbott cautions investors that any forward-looking statements or projections made by Abbott, including those made in this document, are subject to risks and uncertainties that may cause actual results to differ materially from those projected. Economic, competitive, governmental, technological and other factors that may affect Abbott’s operations are discussed in Item 1A, Risk Factors, in the 20142015 Annual Report on Form 10-K.
23PART I. FINANCIAL INFORMATION
PART I.Item 3.FINANCIAL INFORMATIONQuantitative and Qualitative Disclosures about Market Risk
Market Price Sensitive Investments
The fair value of the available-for-sale equity securities held by Abbott was approximately $3.2 billion as of March 31, 2016 and $3.8 billion as of December 31, 2015. The decrease is due primarily to a decrease in the share price of the shares of Mylan N.V. that Abbott received in the sale of its developed markets branded generics pharmaceuticals business and that it continued to hold at March 31, 2016. All available-for-sale equity securities are subject to potential changes in market value. A hypothetical 20 percent decrease in the share prices of these investments would decrease their fair value at March 31, 2016 by approximately $650 million. Abbott monitors these investments for other than temporary declines in market value, and charges impairment losses to income when an other than temporary decline in value occurs.
Item 4.Controls and Procedures
(a) Evaluation of disclosure controls and procedures. The Chief Executive Officer, Miles D. White, and Chief Financial Officer, Thomas C. Freyman,Brian B. Yoor, evaluated the effectiveness of Abbott Laboratories’ disclosure controls and procedures as of the end of the period covered by this report, and concluded that Abbott Laboratories’ disclosure controls and procedures were effective to ensure that information Abbott is required to disclose in the reports that it files or submits with the Securities and Exchange Commission (the “Commission”) under the Securities Exchange Act of 1934 (the “Exchange Act”) is recorded, processed, summarized and reported, within the time periods specified in the Commission’s rules and forms, and to ensure that information required to be disclosed by Abbott in the reports that it files or submits under the Exchange Act is accumulated and communicated to Abbott’s management, including its principal executive officer and principal financial officer, as appropriate to allow timely decisions regarding required disclosure.
(b) Changes in internal control over financial reporting. During the quarter ended March 31, 2015,2016, there were no changes in Abbott’s internal control over financial reporting (as defined in Rule 13a-15(f) under the Exchange Act) that have materially affected, or are reasonably likely to materially affect, Abbott’s internal control over financial reporting.
Abbott is involved in various claims, legal proceedings and investigations, including those described in our Annual Report on Form 10-K for the year ended December 31, 2014.2015.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
(c) Issuer Purchases of Equity Securities
Period |
| (a) Total |
| (b) Average |
| (c) Total Number |
| (d) Maximum |
| ||
January 1, 2015 — January 31, 2015 |
| 64,507 | (1) | $ | 44.730 |
| — |
| $ | 3,511,537,561 | (2) |
February 1, 2015 — February 28, 2015 |
| 17,166,191 | (1) | $ | 46.062 |
| 17,100,000 |
| $ | 2,723,837,671 | (2) |
March 1, 2015 — March 31, 2015 |
| 9,840,102 | (1) | $ | 46.997 |
| 9,836,795 |
| $ | 2,261,537,480 | (2) |
Total |
| 27,070,800 | (1) | $ | 46.399 |
| 26,936,795 |
| $ | 2,261,537,480 | (2) |
Period |
| (a) Total |
| (b) Average |
| (c) Total Number |
| (d) Maximum |
| ||
January 1, 2016 — January 31, 2016 |
| 190,519 | (1) | $ | 40.630 |
| — |
| $ | 1,333,561,834 | (2) |
February 1, 2016 — February 29, 2016 |
| 3,510,333 | (1) | $ | 39.065 |
| 3,450,000 |
| $ | 1,198,687,909 | (2) |
March 1, 2016 — March 31, 2016 |
| 6,951,412 | (1) | $ | 39.361 |
| 6,950,000 |
| $ | 925,131,209 | (2) |
Total |
| 10,652,264 | (1) | $ | 39.286 |
| 10,400,000 |
| $ | 925,131,209 | (2) |
(1) These shares includeinclude:
(i) the shares deemed surrendered to Abbott to pay the exercise price in connection with the exercise of employee stock options — 64,507190,519 in January, 66,19160,333 in February, and 3,3071,412 in March; and
(ii) the shares purchased on the open market for the benefit of participants in the Abbott Laboratories, Limited Employee Stock Purchase Plan — 0 in January, 0 in February, and 0 in March.
These shares do not include the shares surrendered to Abbott to satisfy tax withholding obligations in connection with the vesting of restricted stock or restricted stock units.
(2) On June 14, 2013, Abbott announced that its board of directors approved the purchase of up to $3 billion of its common shares, from time to time (the “2013 Plan”). On September 11, 2014, Abbott announced that its board of directors approved the purchase of up to $3 billion of its common shares, from time to timetime.
On May 2, 2016, Abbott and Alere Inc. (“Alere”) received a request for additional information (a “second request”) from the United States Federal Trade Commission (the “2014 Plan”“FTC”) relating to Abbott’s potential acquisition of Alere. The second request was issued under the Hart-Scott Rodino Antitrust Improvements Act of 1976, as amended (the “HSR Act”). The 2014 Plan is in addition to the unused portioneffect of the 2013 Plan of $512 million. The amount available for repurchase undersecond request is to extend the remaining portion ofwaiting period imposed by the 2013 plan has been fully utilized as part ofHSR Act until 30 days after Abbott and Alere have substantially complied with the share repurchases insecond request, unless the first quarter of 2015.period is extended voluntarily by the parties or terminated sooner by the FTC.
Incorporated by reference to the Exhibit Index included herewith.
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
ABBOTT LABORATORIES |
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| Date: May |
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EXHIBIT INDEX
Exhibit No. |
| Exhibit |
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12 |
| Statement re: Computation of ratio of earnings to fixed charges. |
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31.1 |
| Certification of Chief Executive Officer Required by Rule 13a-14(a) (17 CFR 240.13a-14(a)). |
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31.2 |
| Certification of Chief Financial Officer Required by Rule 13a-14(a) (17 CFR 240.13a-14(a)). |
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Exhibits 32.1 and 32.2 are furnished herewith and should not be deemed to be “filed” under the Securities Exchange Act of 1934. | ||
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32.1 |
| Certification of Chief Executive Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
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32.2 |
| Certification of Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
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101 |
| The following financial statements and notes from the Abbott Laboratories Quarterly Report on Form 10-Q for the quarter ended March 31, |