UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
x☒QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 20182019
OR
o☐TRANSITION 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
100 Abbott Park Road
Abbott Park, Illinois60064-6400
Telephone: (224) (224) 667-6100
Securities Registered Pursuant to Section 12(b) of the Act:
Title of Each Class | Trading Symbol(s) | Name of Each Exchange on Which Registered | ||
Common Shares, Without Par Value | | ABT | | New York Stock Exchange |
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 1934l934 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 every Interactive Data File required to be submitted 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 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, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
| | | |
Large Accelerated Filer | ☒ | Accelerated Filer | ☐ |
Non-Accelerated Filer | ☐ | Smaller reporting company | ☐ |
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| |
Emerging growth company | ☐ |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o◻
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 September 30, 2018,2019, Abbott Laboratories had 1,756,333,0321,768,455,705 common shares without par value outstanding.
Abbott Laboratories
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Item 1. Financial Statements and Supplementary Data | |
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3 | |
4 | |
5 | |
Condensed Consolidated Statement of Shareholders’ Investment | 6 |
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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations |
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Item 2. Unregistered Sales of Equity Securities and Use of Proceeds |
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2
Abbott Laboratories and Subsidiaries
Condensed Consolidated Statement of Earnings
(Unaudited)
(dollars in millions except per share data; shares in thousands)
|
| Three Months Ended |
| Nine Months Ended |
| ||||||||
|
| September 30 |
| September 30 |
| ||||||||
|
| 2018 |
| 2017 |
| 2018 |
| 2017 |
| ||||
Net sales |
| $ | 7,656 |
| $ | 6,829 |
| $ | 22,813 |
| $ | 19,801 |
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|
|
|
|
|
|
|
|
| ||||
Cost of products sold, excluding amortization of intangible assets |
| 3,166 |
| 2,876 |
| 9,515 |
| 9,127 |
| ||||
Amortization of intangible assets |
| 544 |
| 501 |
| 1,690 |
| 1,415 |
| ||||
Research and development |
| 574 |
| 568 |
| 1,738 |
| 1,641 |
| ||||
Selling, general and administrative |
| 2,377 |
| 2,115 |
| 7,385 |
| 6,705 |
| ||||
Total operating cost and expenses |
| 6,661 |
| 6,060 |
| 20,328 |
| 18,888 |
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|
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Operating earnings |
| 995 |
| 769 |
| 2,485 |
| 913 |
| ||||
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Interest expense |
| 203 |
| 218 |
| 640 |
| 658 |
| ||||
Interest (income) |
| (22 | ) | (36 | ) | (71 | ) | (89 | ) | ||||
Net foreign exchange (gain) loss |
| 11 |
| (6 | ) | 2 |
| (34 | ) | ||||
Net loss on extinguishment of debt |
| 67 |
| — |
| 81 |
| — |
| ||||
Other (income) expense, net |
| 18 |
| (33 | ) | (93 | ) | (1,279 | ) | ||||
Earnings from continuing operations before taxes |
| 718 |
| 626 |
| 1,926 |
| 1,657 |
| ||||
Taxes on earnings from continuing operations |
| 166 |
| 65 |
| 247 |
| 440 |
| ||||
Earnings from continuing operations |
| 552 |
| 561 |
| 1,679 |
| 1,217 |
| ||||
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| ||||
Earnings from discontinued operations, net of tax |
| 11 |
| 42 |
| 35 |
| 88 |
| ||||
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| ||||
Net Earnings |
| $ | 563 |
| $ | 603 |
| $ | 1,714 |
| $ | 1,305 |
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Basic Earnings Per Common Share — |
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Continuing operations |
| $ | 0.31 |
| $ | 0.32 |
| $ | 0.95 |
| $ | 0.70 |
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Discontinued operations |
| 0.01 |
| 0.02 |
| 0.02 |
| 0.05 |
| ||||
Net earnings |
| $ | 0.32 |
| $ | 0.34 |
| $ | 0.97 |
| $ | 0.75 |
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Diluted Earnings Per Common Share — |
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Continuing operations |
| $ | 0.31 |
| $ | 0.32 |
| $ | 0.94 |
| $ | 0.69 |
|
Discontinued operations |
| 0.01 |
| 0.02 |
| 0.02 |
| 0.05 |
| ||||
Net earnings |
| $ | 0.32 |
| $ | 0.34 |
| $ | 0.96 |
| $ | 0.74 |
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Cash Dividends Declared Per Common Share |
| $ | 0.28 |
| $ | 0.265 |
| $ | 0.84 |
| $ | 0.795 |
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Average Number of Common Shares Outstanding Used for Basic Earnings Per Common Share |
| 1,759,585 |
| 1,743,757 |
| 1,757,018 |
| 1,737,310 |
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Dilutive Common Stock Options |
| 12,095 |
| 10,399 |
| 11,692 |
| 8,866 |
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Average Number of Common Shares Outstanding Plus Dilutive Common Stock Options |
| 1,771,680 |
| 1,754,156 |
| 1,768,710 |
| 1,746,176 |
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Outstanding Common Stock Options Having No Dilutive Effect |
| 44 |
| 282 |
| 44 |
| 282 |
|
| | | | | | | | | | | | |
| | Three Months Ended September 30 | | Nine Months Ended September 30 | ||||||||
|
| 2019 |
| 2018 |
| 2019 |
| 2018 | ||||
Net sales | | $ | 8,076 | | $ | 7,656 | | $ | 23,590 | | $ | 22,813 |
| | | | | | | | | | | | |
Cost of products sold, excluding amortization of intangible assets | |
| 3,358 | |
| 3,166 | |
| 9,797 | |
| 9,515 |
Amortization of intangible assets | |
| 484 | |
| 544 | |
| 1,453 | |
| 1,690 |
Research and development | |
| 596 | |
| 574 | |
| 1,845 | |
| 1,738 |
Selling, general and administrative | |
| 2,440 | |
| 2,377 | |
| 7,352 | |
| 7,385 |
Total operating cost and expenses | |
| 6,878 | |
| 6,661 | |
| 20,447 | |
| 20,328 |
| | | | | | | | | | | | |
Operating earnings | |
| 1,198 | |
| 995 | |
| 3,143 | |
| 2,485 |
| | | | | | | | | | | | |
Interest expense | |
| 167 | |
| 203 | |
| 506 | |
| 640 |
Interest (income) | |
| (24) | |
| (22) | |
| (69) | |
| (71) |
Net foreign exchange (gain) loss | |
| 7 | |
| 11 | |
| 9 | |
| 2 |
Net loss on extinguishment of debt | | | — | | | 67 | | | — | | | 81 |
Other (income) expense, net | |
| (55) | |
| 18 | |
| (140) | |
| (93) |
Earnings from continuing operations before taxes | |
| 1,103 | |
| 718 | |
| 2,837 | |
| 1,926 |
Taxes on earnings from continuing operations | |
| 143 | |
| 166 | |
| 199 | |
| 247 |
Earnings from continuing operations | |
| 960 | |
| 552 | |
| 2,638 | |
| 1,679 |
| | | | | | | | | | | | |
Earnings from discontinued operations, net of tax | | | — | | | 11 | | | — | | | 35 |
| | | | | | | | | | | | |
Net Earnings |
| $ | 960 |
| $ | 563 | | $ | 2,638 |
| $ | 1,714 |
| | | | | | | | | | | | |
Basic Earnings Per Common Share — | | | | | | | | | | | | |
Continuing operations |
| $ | 0.54 |
| $ | 0.31 | | $ | 1.48 |
| $ | 0.95 |
Discontinued operations | |
| — | |
| 0.01 | |
| — | |
| 0.02 |
Net earnings |
| $ | 0.54 |
| $ | 0.32 | | $ | 1.48 |
| $ | 0.97 |
| | | | | | | | | | | | |
Diluted Earnings Per Common Share — | | | | | | | | | | | | |
Continuing operations |
| $ | 0.53 |
| $ | 0.31 | | $ | 1.47 |
| $ | 0.94 |
Discontinued operations | |
| — | |
| 0.01 | |
| — | |
| 0.02 |
Net earnings |
| $ | 0.53 |
| $ | 0.32 | | $ | 1.47 |
| $ | 0.96 |
| | | | | | | | | | | | |
Average Number of Common Shares Outstanding Used for Basic Earnings Per Common Share | |
| 1,771,521 | |
| 1,759,585 | |
| 1,767,985 | |
| 1,757,018 |
Dilutive Common Stock Options | |
| 12,646 | |
| 12,095 | |
| 12,818 | |
| 11,692 |
Average Number of Common Shares Outstanding Plus Dilutive Common Stock Options | |
| 1,784,167 | |
| 1,771,680 | |
| 1,780,803 | |
| 1,768,710 |
| | | | | | | | | | | | |
Outstanding Common Stock Options Having No Dilutive Effect | |
| 61 | |
| 44 | |
| 61 | |
| 44 |
The accompanying notes to the condensed consolidated financial statements are an integral part of this statement.
3
Abbott Laboratories and Subsidiaries
Condensed Consolidated Statement of Comprehensive Income
(Unaudited)
(dollars in millions)
|
| Three Months Ended |
| Nine Months Ended |
| ||||||||
|
| September 30 |
| September 30 |
| ||||||||
|
| 2018 |
| 2017 |
| 2018 |
| 2017 |
| ||||
Net Earnings |
| $ | 563 |
| $ | 603 |
| $ | 1,714 |
| $ | 1,305 |
|
Foreign currency translation gain (loss) adjustments |
| (153 | ) | 285 |
| (1,179 | ) | 1,106 |
| ||||
Net actuarial gains (losses) and amortization of net actuarial (losses) and prior service (cost) and credits, net of taxes of $16 and $48 in 2018 and $11 and $34 in 2017 |
| 22 |
| 23 |
| 106 |
| 86 |
| ||||
Unrealized gains (losses) on marketable equity securities, net of taxes of $2 and $62 in 2017 |
| — |
| (136 | ) | — |
| (54 | ) | ||||
Net gains (losses) for derivative instruments designated as cash flow hedges and other, net of taxes of $16 and $44 in 2018 and $(10) and $(49) in 2017 |
| 35 |
| (38 | ) | 121 |
| (140 | ) | ||||
Other comprehensive income (loss) |
| (96 | ) | 134 |
| (952 | ) | 998 |
| ||||
Comprehensive Income (Loss) |
| $ | 467 |
| $ | 737 |
| $ | 762 |
| $ | 2,303 |
|
| | | | | | | | | | | | |
| | Three Months Ended September 30 | | Nine Months Ended September 30 | ||||||||
|
| 2019 |
| 2018 |
| 2019 |
| 2018 | ||||
Net Earnings | | $ | 960 | | $ | 563 | | $ | 2,638 | | $ | 1,714 |
Foreign currency translation gain (loss) adjustments | |
| (478) | |
| (153) | |
| (265) | |
| (1,179) |
Net actuarial gains (losses) and amortization of net actuarial losses and prior service costs and credits, net of taxes of $7 and $21 in 2019 and $16 and $48 in 2018 | |
| 31 | |
| 22 | |
| 80 | |
| 106 |
Net gains (losses) for derivative instruments designated as cash flow hedges and other, net of taxes of $23 and $8 in 2019 and $16 and $44 in 2018 | |
| 49 | |
| 35 | |
| 8 | |
| 121 |
Other comprehensive (loss) | |
| (398) | |
| (96) | |
| (177) | |
| (952) |
Comprehensive Income |
| $ | 562 |
| $ | 467 | | $ | 2,461 |
| $ | 762 |
|
| September 30, |
| December 31, |
| ||
Supplemental Accumulated Other Comprehensive Income (Loss) Information, net of tax: |
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|
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Cumulative foreign currency translation (loss) adjustments |
| $ | (4,631 | ) | $ | (3,452 | ) |
Net actuarial (losses) and prior service (costs) and credits |
| (2,415 | ) | (2,521 | ) | ||
Cumulative unrealized gains (losses) on marketable equity securities |
| — |
| (5 | ) | ||
Cumulative gains (losses) on derivative instruments designated as cash flow hedges and other |
| 37 |
| (84 | ) | ||
Accumulated other comprehensive income (loss) |
| $ | (7,009 | ) | $ | (6,062 | ) |
| | | | | | |
| | September 30, | | December 31, | ||
|
| 2019 |
| 2018 | ||
Supplemental Accumulated Other Comprehensive Income (Loss) Information, net of tax: | | | | | | |
Cumulative foreign currency translation (loss) adjustments | | $ | (5,177) | | $ | (4,912) |
Net actuarial (losses) and prior service (costs) and credits | |
| (2,646) | |
| (2,726) |
Cumulative gains (losses) on derivative instruments designated as cash flow hedges and other | |
| 60 | |
| 52 |
Accumulated other comprehensive income (loss) | | $ | (7,763) | | $ | (7,586) |
The accompanying notes to the condensed consolidated financial statements are an integral part of this statement.
4
Abbott Laboratories and Subsidiaries
Condensed Consolidated Balance Sheet
(Unaudited)
(dollars in millions)
|
| September 30, |
| December 31, |
| ||
Assets |
|
|
|
|
| ||
Current Assets: |
|
|
|
|
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Cash and cash equivalents |
| $ | 7,369 |
| $ | 9,407 |
|
Short-term investments |
| 181 |
| 203 |
| ||
Trade receivables, less allowances of $326 in 2018 and $294 in 2017 |
| 5,271 |
| 5,249 |
| ||
Inventories: |
|
|
|
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Finished products |
| 2,340 |
| 2,339 |
| ||
Work in process |
| 561 |
| 472 |
| ||
Materials |
| 880 |
| 790 |
| ||
Total inventories |
| 3,781 |
| 3,601 |
| ||
Prepaid expenses and other receivables |
| 1,582 |
| 1,667 |
| ||
Current assets held for disposition |
| 12 |
| 20 |
| ||
Total Current Assets |
| 18,196 |
| 20,147 |
| ||
Investments |
| 971 |
| 883 |
| ||
Property and equipment, at cost |
| 15,520 |
| 15,265 |
| ||
Less: accumulated depreciation and amortization |
| 8,072 |
| 7,658 |
| ||
Net property and equipment |
| 7,448 |
| 7,607 |
| ||
Intangible assets, net of amortization |
| 19,477 |
| 21,473 |
| ||
Goodwill |
| 23,416 |
| 24,020 |
| ||
Deferred income taxes and other assets |
| 2,110 |
| 1,944 |
| ||
Non-current assets held for disposition |
| 19 |
| 176 |
| ||
|
| $ | 71,637 |
| $ | 76,250 |
|
Liabilities and Shareholders’ Investment |
|
|
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Current Liabilities: |
|
|
|
|
| ||
Short-term borrowings |
| $ | 211 |
| $ | 206 |
|
Trade accounts payable |
| 2,730 |
| 2,402 |
| ||
Salaries, wages and commissions |
| 1,241 |
| 1,187 |
| ||
Other accrued liabilities |
| 3,807 |
| 3,811 |
| ||
Dividends payable |
| 493 |
| 489 |
| ||
Income taxes payable |
| 231 |
| 309 |
| ||
Current portion of long-term debt |
| 4,063 |
| 508 |
| ||
Total Current Liabilities |
| 12,776 |
| 8,912 |
| ||
Long-term debt |
| 19,284 |
| 27,210 |
| ||
Post-employment obligations, deferred income taxes and other long-term liabilities |
| 8,679 |
| 9,030 |
| ||
Commitments and Contingencies |
|
|
|
|
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Shareholders’ Investment: |
|
|
|
|
| ||
Preferred shares, one dollar par value Authorized — 1,000,000 shares, none issued |
| — |
| — |
| ||
Common shares, without par value Authorized — 2,400,000,000 shares |
| 23,428 |
| 23,206 |
| ||
Common shares held in treasury, at cost — Shares: 2018: 214,257,440; 2017: 222,305,719 |
| (9,858 | ) | (10,225 | ) | ||
Earnings employed in the business |
| 24,144 |
| 23,978 |
| ||
Accumulated other comprehensive income (loss) |
| (7,009 | ) | (6,062 | ) | ||
Total Abbott Shareholders’ Investment |
| 30,705 |
| 30,897 |
| ||
Noncontrolling Interests in Subsidiaries |
| 193 |
| 201 |
| ||
Total Shareholders’ Investment |
| 30,898 |
| 31,098 |
| ||
|
| $ | 71,637 |
| $ | 76,250 |
|
| | | | | | |
| | September 30, | | December 31, | ||
|
| 2019 |
| 2018 | ||
Assets | | | | | | |
Current Assets: | | | | | | |
Cash and cash equivalents | | $ | 4,091 | | $ | 3,844 |
Short-term investments | |
| 244 | |
| 242 |
Trade receivables, less allowances of $354 in 2019 and $314 in 2018 | |
| 5,450 | |
| 5,182 |
Inventories: | | | | | | |
Finished products | |
| 2,846 | |
| 2,407 |
Work in process | |
| 584 | |
| 499 |
Materials | |
| 962 | |
| 890 |
Total inventories | |
| 4,392 | |
| 3,796 |
Prepaid expenses and other receivables | |
| 1,942 | |
| 1,568 |
Total Current Assets | |
| 16,119 | |
| 14,632 |
Investments | |
| 874 | |
| 897 |
Property and equipment, at cost | |
| 16,343 | |
| 15,706 |
Less: accumulated depreciation and amortization | |
| 8,518 | |
| 8,143 |
Net property and equipment | |
| 7,825 | |
| 7,563 |
Intangible assets, net of amortization | |
| 17,465 | |
| 18,942 |
Goodwill | |
| 23,046 | |
| 23,254 |
Deferred income taxes and other assets | |
| 3,210 | |
| 1,885 |
|
| $ | 68,539 |
| $ | 67,173 |
Liabilities and Shareholders’ Investment | | | | | | |
Current Liabilities: | | | | | | |
Short-term borrowings |
| $ | 204 | | $ | 200 |
Trade accounts payable | |
| 3,029 | |
| 2,975 |
Salaries, wages and commissions | |
| 1,258 | |
| 1,182 |
Other accrued liabilities | |
| 4,112 | |
| 3,780 |
Dividends payable | |
| 567 | |
| 563 |
Income taxes payable | |
| 67 | |
| 305 |
Current portion of long-term debt | |
| 1,254 | |
| 7 |
Total Current Liabilities | |
| 10,491 | |
| 9,012 |
Long-term debt | |
| 17,639 | |
| 19,359 |
Post-employment obligations, deferred income taxes and other long-term liabilities | |
| 8,390 | |
| 8,080 |
Commitments and Contingencies | | | | | | |
Shareholders’ Investment: | | | | | | |
Preferred shares, 1 dollar par value Authorized — 1,000,000 shares, NaN issued | |
| — | |
| — |
Common shares, without par value Authorized — 2,400,000,000 shares | |
| 23,771 | |
| 23,512 |
Common shares held in treasury, at cost — Shares: 2019: 208,249,580; 2018: 215,570,043 | |
| (9,631) | |
| (9,962) |
Earnings employed in the business | |
| 25,440 | |
| 24,560 |
Accumulated other comprehensive income (loss) | |
| (7,763) | |
| (7,586) |
Total Abbott Shareholders’ Investment | |
| 31,817 | |
| 30,524 |
Noncontrolling Interests in Subsidiaries | |
| 202 | |
| 198 |
Total Shareholders’ Investment | |
| 32,019 | |
| 30,722 |
|
| $ | 68,539 | | $ | 67,173 |
The accompanying notes to the condensed consolidated financial statements are an integral part of this statement.
5
Abbott Laboratories and Subsidiaries
Condensed Consolidated Statement of Shareholders’ Investment
(Unaudited)
(in millions except shares and per share data)
| | | | | | |
| | Three Months Ended September 30 | ||||
|
| 2019 |
| 2018 | ||
Common Shares: |
| |
|
| |
|
Balance at June 30 |
| |
|
| |
|
Shares: 2019: 1,976,248,129; 2018: 1,969,575,366 | | $ | 23,665 | | $ | 23,317 |
Issued under incentive stock programs | |
|
| |
|
|
Shares: 2019: 457,156; 2018: 1,015,106 | |
| 18 | |
| 33 |
Share-based compensation | |
| 93 | |
| 83 |
Issuance of restricted stock awards | |
| (5) | |
| (5) |
Balance at September 30 | | | | | | |
Shares: 2019: 1,976,705,285; 2018: 1,970,590,472 | | $ | 23,771 | | $ | 23,428 |
| | | | | | |
Common Shares Held in Treasury: | |
|
| |
|
|
Balance at June 30 | | | | | | |
Shares: 2019: 208,850,514; 2018: 215,256,082 | | $ | (9,659) | | $ | (9,907) |
Issued under incentive stock programs | | | | | | |
Shares: 2019: 605,458; 2018: 1,002,519 | |
| 28 | |
| 49 |
Purchased | | | | | | |
Shares: 2019: 4,524; 2018: 3,877 | |
| — | |
| — |
Balance at September 30 | | | | | | |
Shares: 2019: 208,249,580; 2018: 214,257,440 | | $ | (9,631) | | $ | (9,858) |
| | | | | | |
Earnings Employed in the Business: | |
|
| |
|
|
Balance at June 30 | | $ | 25,045 | | $ | 24,080 |
Net earnings | |
| 960 | |
| 563 |
Cash dividends declared on common shares (per share — 2019: $0.32; 2018: $0.28) | |
| (570) | |
| (495) |
Effect of common and treasury share transactions | |
| 5 | |
| (4) |
Balance at September 30 | | $ | 25,440 | | $ | 24,144 |
| | | | | | |
Accumulated Other Comprehensive Income (Loss): | |
|
| |
|
|
Balance at June 30 | | $ | (7,365) | | $ | (6,913) |
Other comprehensive income (loss) | |
| (398) | |
| (96) |
Balance at September 30 | | $ | (7,763) | | $ | (7,009) |
| | | | | | |
Noncontrolling Interests in Subsidiaries: | |
|
| |
|
|
Balance at June 30 | | $ | 208 | | $ | 197 |
Noncontrolling Interests’ share of income, business combinations, net of distributions | |
| (6) | |
| (4) |
Balance at September 30 | | $ | 202 | | $ | 193 |
The accompanying notes to condensed consolidated financial statements are an integral part of this statement.
6
Abbott Laboratories and Subsidiaries
Condensed Consolidated Statement of Shareholders’ Investment
(Unaudited)
(in millions except shares and per share data)
| | | | | | |
| | Nine Months Ended September 30 | ||||
|
| 2019 |
| 2018 | ||
Common Shares: | | | | | | |
Balance at January 1 | | | | | | |
Shares: 2019: 1,971,189,465; 2018: 1,965,908,188 | | $ | 23,512 | | $ | 23,206 |
Issued under incentive stock programs | | | | | | |
Shares: 2019: 5,515,820; 2018: 4,682,284 | |
| 205 | |
| 145 |
Share-based compensation | |
| 436 | |
| 398 |
Issuance of restricted stock awards | |
| (382) | |
| (321) |
Balance at September 30 | | | | | | |
Shares: 2019: 1,976,705,285; 2018: 1,970,590,472 | | $ | 23,771 | | $ | 23,428 |
| | | | | | |
Common Shares Held in Treasury: | | | | | | |
Balance at January 1 | | | | | | |
Shares: 2019: 215,570,043; 2018: 222,305,719 | | $ | (9,962) | | $ | (10,225) |
Issued under incentive stock programs | | | | | | |
Shares: 2019: 7,591,844; 2018: 8,296,855 | | | 352 | |
| 382 |
Purchased | |
| | | | |
Shares: 2019: 271,381; 2018: 248,576 | |
| (21) | |
| (15) |
Balance at September 30 | | | | | | |
Shares: 2019: 208,249,580; 2018: 214,257,440 | | $ | (9,631) | | $ | (9,858) |
| | | | | | |
Earnings Employed in the Business: | | | | | | |
Balance at January 1 | | $ | 24,560 | | $ | 23,978 |
Impact of adoption of new accounting standards | |
| — | |
| 15 |
Net earnings | |
| 2,638 | |
| 1,714 |
Cash dividends declared on common shares (per share — 2019: $0.96; 2018: $0.84) | |
| (1,706) | |
| (1,483) |
Effect of common and treasury share transactions | |
| (52) | |
| (80) |
Balance at September 30 | | $ | 25,440 | | $ | 24,144 |
| | | | | | |
Accumulated Other Comprehensive Income (Loss): | | | | | | |
Balance at January 1 | | $ | (7,586) | | $ | (6,062) |
Impact of adoption of new accounting standard | |
| — | |
| 5 |
Other comprehensive income (loss) | |
| (177) | |
| (952) |
Balance at September 30 | | $ | (7,763) | | $ | (7,009) |
| | | | | | |
Noncontrolling Interests in Subsidiaries: | | | | | | |
Balance at January 1 | | $ | 198 | | $ | 201 |
Noncontrolling Interests’ share of income, business combinations, net of distributions | |
| 4 | |
| (8) |
Balance at September 30 | | $ | 202 | | $ | 193 |
The accompanying notes to condensed consolidated financial statements are an integral part of this statement.
7
Abbott Laboratories and Subsidiaries
Condensed Consolidated Statement of Cash Flows
(Unaudited)
(dollars in millions)
|
| Nine Months Ended September 30 |
| ||||
|
| 2018 |
| 2017 |
| ||
Cash Flow From (Used in) Operating Activities: |
|
|
|
|
| ||
Net earnings |
| $ | 1,714 |
| $ | 1,305 |
|
Adjustments to reconcile net earnings to net cash from operating activities - |
|
|
|
|
| ||
Depreciation |
| 825 |
| 763 |
| ||
Amortization of intangible assets |
| 1,690 |
| 1,415 |
| ||
Share-based compensation |
| 396 |
| 338 |
| ||
Amortization of inventory step-up |
| 32 |
| 840 |
| ||
Gain on sale of businesses |
| — |
| (1,163 | ) | ||
Trade receivables |
| (280 | ) | (169 | ) | ||
Inventories |
| (450 | ) | 39 |
| ||
Other, net |
| 608 |
| 562 |
| ||
Net Cash From Operating Activities |
| 4,535 |
| 3,930 |
| ||
|
|
|
|
|
| ||
Cash Flow From (Used in) Investing Activities: |
|
|
|
|
| ||
Acquisitions of property and equipment |
| (927 | ) | (790 | ) | ||
Acquisitions of businesses and technologies, net of cash acquired |
| — |
| (13,027 | ) | ||
Proceeds from business dispositions |
| 48 |
| 5,442 |
| ||
Proceeds from the sale of Mylan N.V. shares |
| — |
| 1,977 |
| ||
Sales (purchases) of other investment securities, net |
| (23 | ) | (98 | ) | ||
Other |
| 42 |
| 30 |
| ||
Net Cash (Used in) Investing Activities |
| (860 | ) | (6,466 | ) | ||
|
|
|
|
|
| ||
Cash Flow From (Used in) Financing Activities: |
|
|
|
|
| ||
Net borrowings (repayments) of short-term debt and other |
| 22 |
| (1,424 | ) | ||
Proceeds from issuance of long-term debt |
| 4,011 |
| — |
| ||
Repayments of long-term debt |
| (8,279 | ) | (2,508 | ) | ||
Payment of debt issuance costs |
| — |
| (8 | ) | ||
Payment of contingent consideration |
| — |
| (13 | ) | ||
Purchases of common shares |
| (134 | ) | (106 | ) | ||
Proceeds from stock options exercised |
| 244 |
| 275 |
| ||
Dividends paid |
| (1,479 | ) | (1,385 | ) | ||
Net Cash (Used in) Financing Activities |
| (5,615 | ) | (5,169 | ) | ||
|
|
|
|
|
| ||
Effect of exchange rate changes on cash and cash equivalents |
| (98 | ) | 97 |
| ||
|
|
|
|
|
| ||
Net Decrease in Cash and Cash Equivalents |
| (2,038 | ) | (7,608 | ) | ||
Cash and Cash Equivalents, Beginning of Year |
| 9,407 |
| 18,620 |
| ||
Cash and Cash Equivalents, End of Period |
| $ | 7,369 |
| $ | 11,012 |
|
| | | | | | |
| | Nine Months Ended September 30 | ||||
|
| 2019 |
| 2018 | ||
Cash Flow From (Used in) Operating Activities: | | | | | | |
Net earnings | | $ | 2,638 | | $ | 1,714 |
Adjustments to reconcile net earnings to net cash from operating activities - | | | | | | |
Depreciation | |
| 805 | |
| 825 |
Amortization of intangible assets | |
| 1,453 | |
| 1,690 |
Share-based compensation | | | 434 | | | 396 |
Amortization of inventory step-up | | | — | | | 32 |
Trade receivables | |
| (357) | |
| (280) |
Inventories | |
| (730) | |
| (450) |
Other, net | |
| (523) | |
| 608 |
Net Cash From Operating Activities | |
| 3,720 | |
| 4,535 |
| | | | | | |
Cash Flow From (Used in) Investing Activities: | | | | | | |
Acquisitions of property and equipment | |
| (1,204) | |
| (927) |
Acquisitions of businesses and technologies, net of cash acquired | | | (171) | | | (43) |
Proceeds from business dispositions | | | 48 | | | 48 |
Sales (purchases) of other investment securities, net | |
| (22) | |
| (23) |
Other | |
| 23 | |
| 85 |
Net Cash (Used in) Investing Activities | |
| (1,326) | |
| (860) |
| | | | | | |
Cash Flow From (Used in) Financing Activities: | | | | | | |
Net borrowings (repayments) of short-term debt and other | |
| 52 | |
| 22 |
Proceeds from issuance of long-term debt | | | — | | | 4,011 |
Repayments of long-term debt | |
| (523) | |
| (8,279) |
Purchases of common shares | |
| (222) | |
| (134) |
Proceeds from stock options exercised | |
| 291 | |
| 244 |
Dividends paid | |
| (1,702) | |
| (1,479) |
Net Cash (Used in) Financing Activities | |
| (2,104) | |
| (5,615) |
| | | | | | |
Effect of exchange rate changes on cash and cash equivalents | |
| (43) | |
| (98) |
| | | | | | |
Net Increase (Decrease) in Cash and Cash Equivalents | |
| 247 | |
| (2,038) |
Cash and Cash Equivalents, Beginning of Year | |
| 3,844 | |
| 9,407 |
Cash and Cash Equivalents, End of Period |
| $ | 4,091 |
| $ | 7,369 |
The accompanying notes to the condensed consolidated financial statements are an integral part of this statement.
8
Abbott Laboratories and Subsidiaries
Notes to the Condensed Consolidated Financial Statements
September 30, 20182019
(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, 2017.2018. The condensed consolidated financial statements include the accounts of the parent company and subsidiaries, after elimination of intercompany transactions.
Note 2 — New Accounting Standards
Recently Adopted Accounting Standards
In March 2017,February 2016, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2017-07,2016-02, Compensation — Retirement Benefits (Topic 715): Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost which changes the financial statement presentation requirements for pension and other postretirement benefit expense. While service cost continues to be reported in the same financial statement line items as other current employee compensation costs, the ASU requires all other components of pension and other postretirement benefit expense to be presented separately from service cost, and outside any subtotal of income from operations. Abbott adopted the standard in the first quarter of 2018 and the Condensed Consolidated Statement of Earnings was retrospectively adjusted, resulting in the reclassification of approximately $120 million of income from Operating earnings to Other (income) expense, net in the first nine months of 2017.
In November 2016, the FASB issued ASU 2016-18, Statement of Cash Flows: Restricted CashLeases, which requires that restricted cash be included with cashlessees to measure and cash equivalents when reconciling the beginningrecognize a lease asset and end-of-period total amounts shownliability on the statement of cash flows. Abbott adopted this standard beginning in the first quarter of 2018, and applied the guidance retrospectively to all periods presented. Abbott did not have any restricted cash balances in the periods presented exceptbalance sheet for $75 million of restricted cash acquired as part of the Alere Inc. acquisition in October 2017. The restrictions on this cash were eliminated prior to the end of 2017.
In October 2016, the FASB issued ASU 2016-16, Income Taxes (Topic 740): Intra-Entity Transfers of Assets Other Than Inventory, which requires the recognition of the income tax effects of intercompany sales and transfers of assets, other than inventory, in the period in which the transfer occurs. Abbott adopted the standard on January 1, 2018, using a modified retrospective approach and recorded a cumulative catch-up adjustment to Earnings employed in the business in the Condensed Consolidated Balance Sheet that was not significant.
In August 2016, the FASB issued ASU 2016-15, Statement of Cash Flows: Classification of Certain Cash Receipts and Cash Payments, which clarifies how companies should present and classify certain cash receipts and cash payments in the statement of cash flows. The ASU became effective for Abbott in the first quarter of 2018 and did not have a material impact to the Company’s Condensed Consolidated Statement of Cash Flows.
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. Abbott adopted the standard on January 1, 2018. Under the new standard, changes in the fair value of equity investments with readily determinable fair values are recorded in Other (income) expense, net within the Condensed Consolidated Statement of Earnings. Previously, such fair value changes were recorded in other comprehensive income. Abbott has elected the measurement alternative allowed by ASU 2016-01 for its equity investments without readily determinable fair values. These investments are measured at cost, less any impairment, plus or minus any changes resulting from observable price changes in orderly transactions for an identical or similar investment of the same issuer. Changes in the measurement of these investments are being recorded in Other (income) expense, net within the Condensed Consolidated Statement of Earnings. As part of the adoption, the cumulative-effect adjustment to Earnings employed in the business in the Condensed Consolidated Balance Sheet for net unrealized losses on equity investments that were recorded in Accumulated other comprehensive income (loss) as of December 31, 2017 was not significant.
Abbott Laboratories and Subsidiaries
Notes to the Condensed Consolidated Financial Statements
September 30, 2018
(Unaudited)
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 supersedes nearly all previously existing revenue recognition guidance. The core principle of the ASU is that an entity should recognize revenue when it transfers promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services.most leases, including operating leases. Abbott adopted the new standard as of January 1, 2018,2019 using the modified retrospective approach method. Under this method, entities recognizeand applied the cumulative effectstandard’s transition provisions as of applyingJanuary 1, 2019. As a result, no changes were made to the December 31, 2018 Consolidated Balance Sheet. Abbott elected to apply the package of practical expedients related to transition. These practical expedients allowed Abbott to carry forward its historical assessments of whether any existing contracts are or contain leases, the lease classification for each lease existing at January 1, 2019, and whether any initial direct costs for such leases qualified for capitalization.
The new lease accounting standard atdoes not have a material impact on the dateamounts reported in the Condensed Consolidated Statement of initial application with no restatementEarnings but does have a material impact on the amounts reported in the Condensed Consolidated Balance Sheet. Adoption of comparative periods presented. The cumulative effect of applying the new standard resulted in an increase to Earnings employed in the business inrecording of approximately $850 million of new right of use (ROU) assets and additional liabilities for operating leases on the Condensed Consolidated Balance Sheet of $23 million which was recorded on January 1, 2018. The new standard has been applied only to those contracts that were not completed as of January 1, 2018. The impact of adopting ASU 2014-09 was not significant to individual financial statement line items in the Condensed Consolidated Balance Sheet and Condensed Consolidated Statement of Earnings.2019.
Recent Accounting Standards Not Yet Adopted
In February 2018, the FASB issued ASU 2018-02, Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income, which allows companies to reclassify stranded tax effects resulting from the 2017 Tax Cuts and Jobs Act, from accumulated other comprehensive income to retained earnings. The standard becomes effective for Abbott beginning in the first quarter of 2019 and early adoption is permitted. Abbott is currently evaluating the effect that the new guidance will have on its consolidated financial statements.
In August 2017, the FASB issued ASU 2017-12, Targeted Improvements to Accounting for Hedging Activities, which makes changes to the designation and measurement guidance for qualifying hedging relationships and the presentation of hedge results. The standard becomes effective for Abbott beginning in the first quarter of 2019 and early adoption is permitted. Abbott is currently evaluating the effect that the new guidance will have on its consolidated financial statements.
In FebruaryJune 2016, the FASB issued ASU 2016-02,2016-13, LeasesFinancial Instruments – Credit Losses, which changes the methodology to be used to measure credit losses for certain financial instruments and financial assets, including trade receivables. The new methodology requires lesseesthe recognition of an allowance that reflects the current estimate of credit losses expected to recognize assets and liabilities for most leases onbe incurred over the balance sheet.life of the financial asset. The new standard becomeswill be effective for Abbott beginning in the first quarter of 2019 and early adoption is permitted. Abbott will elect the transition method that allows the company to apply the standard at its adoption date rather than the beginning of the earliest comparative period presented in the financial statements.2020, with early adoption permitted. Abbott is currently evaluatingassessing the effect that theimpact of this new guidance will havestandard on its consolidated financial statements.
Note 3 — Revenue
Abbott’s revenues are derived primarily from the sale of a 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 products are generally sold directly to retailers, wholesalers, distributors, hospitals, health care facilities, laboratories, physicians’ offices and government agencies throughout the world. Abbott has four4 reportable segments: Established Pharmaceutical Products, Diagnostic Products, Nutritional Products, and Cardiovascular and Neuromodulation Products. Diabetes Care is a non-reportable segment and is included in Other in the following table.Other.
9
Abbott Laboratories and Subsidiaries
Notes to the Condensed Consolidated Financial Statements
September 30, 20182019
(Unaudited)
The following tables provide detail by sales category:
|
| Three Months Ended September 30, 2018 |
| Three Months Ended September 30, 2017 |
| ||||||||||||||||||||||||||||||||
| | | | | | | | | | | | | | | | | | | |||||||||||||||||||
| | Three Months Ended September 30, 2019 | | Three Months Ended September 30, 2018 | |||||||||||||||||||||||||||||||||
(in millions) |
| U.S. |
| Int’l |
| Total |
| U.S. |
| Int’l |
| Total |
|
| U.S. |
| Int’l |
| Total |
| U.S. |
| Int’l |
| Total | ||||||||||||
Established Pharmaceutical Products — |
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
| ||||||
Key Emerging Markets |
| $ | — |
| $ | 866 |
| $ | 866 |
| $ | — |
| $ | 885 |
| $ | 885 |
| | $ | — | | $ | 891 | | $ | 891 | | $ | — | | $ | 866 | | $ | 866 |
Other |
| — |
| 293 |
| 293 |
| — |
| 286 |
| 286 |
| |
| — | |
| 321 | |
| 321 | |
| — | |
| 293 | | | 293 | ||||||
Total |
| — |
| 1,159 |
| 1,159 |
| — |
| 1,171 |
| 1,171 |
| |
| — | |
| 1,212 | |
| 1,212 | |
| — | |
| 1,159 |
| | 1,159 | ||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||||||||||||
| | | | | | | | | | | | | | | | | | | |||||||||||||||||||
Nutritionals — |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| ||||||
Pediatric Nutritionals |
| 459 |
| 580 |
| 1,039 |
| 436 |
| 539 |
| 975 |
| |
| 478 | |
| 566 | |
| 1,044 | |
| 459 | |
| 580 | |
| 1,039 | ||||||
Adult Nutritionals |
| 315 |
| 484 |
| 799 |
| 323 |
| 470 |
| 793 |
| |
| 310 | |
| 520 | |
| 830 | |
| 315 | |
| 484 | |
| 799 | ||||||
Total |
| 774 |
| 1,064 |
| 1,838 |
| 759 |
| 1,009 |
| 1,768 |
| |
| 788 | |
| 1,086 | |
| 1,874 | |
| 774 | |
| 1,064 | |
| 1,838 | ||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||||||||||||
| | | | | | | | | | | | | | | | | | | |||||||||||||||||||
Diagnostics — |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| ||||||
Core Laboratory |
| 249 |
| 837 |
| 1,086 |
| 230 |
| 803 |
| 1,033 |
| |
| 272 | |
| 905 | |
| 1,177 | |
| 249 | |
| 837 | |
| 1,086 | ||||||
Molecular |
| 37 |
| 84 |
| 121 |
| 37 |
| 78 |
| 115 |
| |
| 35 | |
| 76 | |
| 111 | |
| 37 | |
| 84 | |
| 121 | ||||||
Point of Care |
| 106 |
| 30 |
| 136 |
| 102 |
| 29 |
| 131 |
| |
| 112 | |
| 32 | |
| 144 | |
| 106 | |
| 30 | |
| 136 | ||||||
Rapid Diagnostics |
| 274 |
| 207 |
| 481 |
| — |
| — |
| — |
| |
| 283 | |
| 194 | |
| 477 | |
| 274 | |
| 207 | |
| 481 | ||||||
Total |
| 666 |
| 1,158 |
| 1,824 |
| 369 |
| 910 |
| 1,279 |
| |
| 702 | |
| 1,207 | |
| 1,909 | |
| 666 | |
| 1,158 | |
| 1,824 | ||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||||||||||||
| | | | | | | | | | | | | | | | | | | |||||||||||||||||||
Cardiovascular and Neuromodulation — |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| ||||||
Rhythm Management |
| 252 |
| 256 |
| 508 |
| 250 |
| 261 |
| 511 |
| |
| 265 | |
| 273 | |
| 538 | |
| 272 | |
| 261 | |
| 533 | ||||||
Electrophysiology |
| 189 |
| 217 |
| 406 |
| 147 |
| 195 |
| 342 |
| |
| 185 | |
| 242 | |
| 427 | |
| 169 | |
| 212 | |
| 381 | ||||||
Heart Failure |
| 111 |
| 41 |
| 152 |
| 131 |
| 39 |
| 170 |
| |
| 136 | |
| 50 | |
| 186 | |
| 111 | |
| 41 | |
| 152 | ||||||
Vascular |
| 284 |
| 436 |
| 720 |
| 292 |
| 432 |
| 724 |
| |
| 251 | |
| 446 | |
| 697 | |
| 284 | |
| 436 | |
| 720 | ||||||
Structural Heart |
| 126 |
| 179 |
| 305 |
| 109 |
| 160 |
| 269 |
| |
| 158 | |
| 190 | |
| 348 | |
| 126 | |
| 179 | |
| 305 | ||||||
Neuromodulation |
| 172 |
| 40 |
| 212 |
| 164 |
| 44 |
| 208 |
| |
| 165 | |
| 39 | |
| 204 | |
| 172 | |
| 40 | |
| 212 | ||||||
Total |
| 1,134 |
| 1,169 |
| 2,303 |
| 1,093 |
| 1,131 |
| 2,224 |
| |
| 1,160 | |
| 1,240 | |
| 2,400 | |
| 1,134 | |
| 1,169 | |
| 2,303 | ||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||||||||||||
| | | | | | | | | | | | | | | | | | | |||||||||||||||||||
Other |
| 133 |
| 399 |
| 532 |
| 92 |
| 295 |
| 387 |
| |
| 184 | |
| 497 | |
| 681 | |
| 133 | |
| 399 | |
| 532 | ||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||||||||||||
Total |
| $ | 2,707 |
| $ | 4,949 |
| $ | 7,656 |
| $ | 2,313 |
| $ | 4,516 |
| $ | 6,829 |
| | $ | 2,834 | | $ | 5,242 | | $ | 8,076 | | $ | 2,707 | | $ | 4,949 | | $ | 7,656 |
|
| Nine Months Ended September 30, 2018 |
| Nine Months Ended September 30, 2017 |
| ||||||||||||||||||||||||||||||||
| | | | | | | | | | | | | | | | | | | |||||||||||||||||||
| | Nine Months Ended September 30, 2019 | | Nine Months Ended September 30, 2018 | |||||||||||||||||||||||||||||||||
(in millions) |
| U.S. |
| Int’l |
| Total |
| U.S. |
| Int’l |
| Total |
|
| U.S. |
| Int’l |
| Total |
| U.S. |
| Int’l |
| Total | ||||||||||||
Established Pharmaceutical Products — |
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
| |
|
| |
|
| |
|
| |
| | |
| ||||||
Key Emerging Markets |
| $ | — |
| $ | 2,525 |
| $ | 2,525 |
| $ | — |
| $ | 2,413 |
| $ | 2,413 |
| | $ | — | | $ | 2,496 | | $ | 2,496 | | $ | — | | $ | 2,525 | | $ | 2,525 |
Other |
| — |
| 807 |
| 807 |
| — |
| 729 |
| 729 |
| |
| — | |
| 816 | |
| 816 | |
| — | |
| 807 | | | 807 | ||||||
Total |
| — |
| 3,332 |
| 3,332 |
| — |
| 3,142 |
| 3,142 |
| |
| — | |
| 3,312 | |
| 3,312 | |
| — | |
| 3,332 |
| | 3,332 | ||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||||||||||||
| | | | | | | | | | | | | | | | | | | |||||||||||||||||||
Nutritionals — |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| ||||||
Pediatric Nutritionals |
| 1,376 |
| 1,708 |
| 3,084 |
| 1,327 |
| 1,562 |
| 2,889 |
| |
| 1,406 | |
| 1,718 | |
| 3,124 | |
| 1,376 | |
| 1,708 | |
| 3,084 | ||||||
Adult Nutritionals |
| 937 |
| 1,431 |
| 2,368 |
| 935 |
| 1,317 |
| 2,252 |
| |
| 915 | |
| 1,502 | |
| 2,417 | |
| 937 | |
| 1,431 | |
| 2,368 | ||||||
Total |
| 2,313 |
| 3,139 |
| 5,452 |
| 2,262 |
| 2,879 |
| 5,141 |
| |
| 2,321 | |
| 3,220 | |
| 5,541 | |
| 2,313 | |
| 3,139 | |
| 5,452 | ||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||||||||||||
| | | | | | | | | | | | | | | | | | | |||||||||||||||||||
Diagnostics — |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| ||||||
Core Laboratory |
| 725 |
| 2,508 |
| 3,233 |
| 678 |
| 2,286 |
| 2,964 |
| |
| 793 | |
| 2,614 | |
| 3,407 | |
| 725 | |
| 2,508 | |
| 3,233 | ||||||
Molecular |
| 114 |
| 247 |
| 361 |
| 123 |
| 218 |
| 341 |
| |
| 113 | |
| 213 | |
| 326 | |
| 114 | |
| 247 | |
| 361 | ||||||
Point of Care |
| 324 |
| 92 |
| 416 |
| 324 |
| 81 |
| 405 |
| |
| 334 | |
| 90 | |
| 424 | |
| 324 | |
| 92 | |
| 416 | ||||||
Rapid Diagnostics |
| 855 |
| 669 |
| 1,524 |
| — |
| — |
| — |
| |
| 881 | |
| 617 | |
| 1,498 | |
| 855 | |
| 669 | |
| 1,524 | ||||||
Total |
| 2,018 |
| 3,516 |
| 5,534 |
| 1,125 |
| 2,585 |
| 3,710 |
| |
| 2,121 | |
| 3,534 | |
| 5,655 | |
| 2,018 | |
| 3,516 | |
| 5,534 | ||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||||||||||||
| | | | | | | | | | | | | | | | | | | |||||||||||||||||||
Cardiovascular and Neuromodulation — |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| ||||||
Rhythm Management |
| 778 |
| 808 |
| 1,586 |
| 783 |
| 791 |
| 1,574 |
| |
| 790 | |
| 810 | |
| 1,600 | |
| 843 | |
| 824 | |
| 1,667 | ||||||
Electrophysiology |
| 564 |
| 661 |
| 1,225 |
| 446 |
| 555 |
| 1,001 |
| |
| 549 | |
| 713 | |
| 1,262 | |
| 499 | |
| 645 | |
| 1,144 | ||||||
Heart Failure |
| 342 |
| 126 |
| 468 |
| 363 |
| 108 |
| 471 |
| |
| 428 | |
| 143 | |
| 571 | |
| 342 | |
| 126 | |
| 468 | ||||||
Vascular |
| 854 |
| 1,355 |
| 2,209 |
| 891 |
| 1,267 |
| 2,158 |
| |
| 787 | |
| 1,349 | |
| 2,136 | |
| 854 | |
| 1,355 | |
| 2,209 | ||||||
Structural Heart |
| 353 |
| 560 |
| 913 |
| 320 |
| 473 |
| 793 |
| |
| 446 | |
| 578 | |
| 1,024 | |
| 353 | |
| 560 | |
| 913 | ||||||
Neuromodulation |
| 513 |
| 133 |
| 646 |
| 461 |
| 129 |
| 590 |
| |
| 485 | |
| 124 | |
| 609 | |
| 513 | |
| 133 | |
| 646 | ||||||
Total |
| 3,404 |
| 3,643 |
| 7,047 |
| 3,264 |
| 3,323 |
| 6,587 |
| |
| 3,485 | |
| 3,717 | |
| 7,202 | |
| 3,404 | |
| 3,643 | |
| 7,047 | ||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||||||||||||
| | | | | | | | | | | | | | | | | | | |||||||||||||||||||
Other |
| 349 |
| 1,099 |
| 1,448 |
| 346 |
| 875 |
| 1,221 |
| |
| 511 | |
| 1,369 | |
| 1,880 | |
| 349 | |
| 1,099 | |
| 1,448 | ||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||||||||||||
Total |
| $ | 8,084 |
| $ | 14,729 |
| $ | 22,813 |
| $ | 6,997 |
| $ | 12,804 |
| $ | 19,801 |
| | $ | 8,438 | | $ | 15,152 | | $ | 23,590 | | $ | 8,084 | | $ | 14,729 | | $ | 22,813 |
Note: Insertable Cardiac Monitor (ICM) sales, which had previously been reported in Electrophysiology, are now included in Rhythm Management. Historic periods have been adjusted to reflect this change.
10
Abbott Laboratories and Subsidiaries
Notes to the Condensed Consolidated Financial Statements
September 30, 20182019
(Unaudited)
Abbott recognizes revenue from product sales upon the transfer of control, which is generally upon shipment or delivery, depending on the delivery terms set forth in the customer contract. For maintenance agreements that provide service beyond Abbott’s standard warranty and other service agreements, revenue is recognized ratably over the contract term. A time-based measure of progress appropriately reflects the transfer of services to the customer. Payment terms between Abbott and its customers vary by the type of customer, country of sale, and the products or services offered. The term between invoicing and the payment due date is not significant.
Management exercises judgment in estimating variable consideration. Provisions for discounts, rebates and sales incentives to customers, and returns and other adjustments are provided for in the period the related sales are recorded. Sales incentives to customers are not material. Historical data is readily available and reliable, and is used for estimating the amount of the reduction in gross sales. Abbott provides rebates to government agencies, wholesalers, group purchasing organizations and other private entities.
Rebate amounts are usually based upon the volume of purchases using contractual or statutory prices for a product. Factors used in the rebate calculations include the identification of which products have been sold subject to a rebate, which customer or government agency price terms apply, and the estimated lag time between sale and payment of a rebate. Using historical trends, adjusted for current changes, Abbott estimates the amount of the rebate that will be paid, and records the liability as a reduction of gross sales when Abbott records its sale of the product. Settlement of the rebate generally occurs from one to six months after sale. Abbott regularly analyzes the historical rebate trends and makes adjustments to reserves for changes in trends and terms of rebate programs. Historically, adjustments to prior years’ rebate accruals have not been material to net income.
Other allowances charged against gross sales include cash discounts and returns, which are not significant. Cash discounts are known within 15 to 30 days of sale, and therefore can be reliably estimated. Returns can be reliably estimated because Abbott’s historical returns are low, and because sales return terms and other sales terms have remained relatively unchanged for several periods. Product warranties are also not significant.
Abbott also applies judgment in determining the timing of revenue recognition related to contracts that include multiple performance obligations. The total transaction price of the contract is allocated to each performance obligation in an amount based on the estimated relative standalone selling prices of the promised goods or services underlying each performance obligation. For goods or services for which observable standalone selling prices are not available, Abbott uses an expected cost plus a margin approach to estimate the standalone selling price of each performance obligation.
Remaining Performance Obligations
As of September 30, 2018,2019, the estimated revenue expected to be recognized in the future related to performance obligations that are unsatisfied (or partially unsatisfied) was approximately $2.8$3.2 billion in the Diagnostics segment and approximately $330$350 million in the Cardiovascular and Neuromodulation segment. Abbott expects to recognize revenue on approximately 60%60 percent of these remaining performance obligations over the next 24 months, approximately 15%16 percent over the subsequent 12 months and the remainder thereafter.
These performance obligations primarily reflect the future sale of reagents/consumables in contracts with minimum purchase obligations, extended warranty or service obligations related to previously sold equipment, and remote monitoring services related to previously implanted devices. Abbott has applied the practical expedient described in Accounting Standards Codification (ASC) 606-10-50-14 and has not included remaining performance obligations related to contracts with original expected durations of one year or less in the amounts above.
Assets Recognized for Costs to Obtain a Contract with a Customer
Abbott has applied the practical expedient in ASC 340-40-25-4 and records as an expense the incremental costs of obtaining contracts with customers in the period of occurrence when the amortization period of the asset that Abbott otherwise would have recognized is one year or less. Upfront commission fees paid to sales personnel as a result of obtaining or renewing contracts with customers are incremental to obtaining the contract. Abbott capitalizes these amounts as contract costs. Capitalized commission fees are amortized based on the contract duration to which the assets relate which ranges from two to ten years. The amounts as of September 30, 2018, were not significant.
Additionally, the cost of transmitters provided to customers that use Abbott’s remote monitoring service with respect to certain medical devices are capitalized as contract costs. Capitalized transmitter costs are amortized based on the timing of the transfer of services to which the assets relate, which typically ranges from eight to ten years. The amounts as of September 30, 2018, were not significant.
Abbott Laboratories and Subsidiaries
Notes to the Condensed Consolidated Financial Statements
September 30, 2018
(Unaudited)
Other Contract Assets and Liabilities
Abbott discloses Trade receivables separately in the Condensed Consolidated Balance Sheet at their net realizable value. Contract assets primarily relate to Abbott’s conditional right to consideration for work completed but not billed at the reporting date. Contract assets at the beginning and end of the period, as well as the changes in the balance, were not significant.
Contract liabilities primarily relate to payments received from customers in advance of performance under the contract. Abbott’s contract liabilities arise primarily in the Cardiovascular and Neuromodulation reportable segment when payment is received upfront for various multi-period extended service arrangements.
Changes in the contract liabilities during the period are as follows:
| | | | ||||
(in millions) |
|
|
|
| | | |
Contract Liabilities |
|
|
| ||||
Balance at January 1, 2018 |
| $ | 198 |
| |||
Contract Liabilities: | | | | ||||
Balance at December 31, 2018 | | $ | 259 | ||||
Unearned revenue from cash received during the period |
| 209 |
| |
| 285 | |
Revenue recognized that was included in contract liability balance at beginning of period |
| (155 | ) | |
| (249) | |
Balance at September 30, 2018 |
| $ | 252 |
| |||
Balance at September 30, 2019 | | $ | 295 |
Note 4 — Discontinued Operations
On January 1, 2013, Abbott completed the separation of AbbVie Inc. (AbbVie), which was formed to hold Abbott’s research-based proprietary pharmaceuticals business. 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. Earnings from discontinued operations, net of tax, of $35 million and $88 million in the first nine months of 2018 and 2017, respectively, were driven primarily by the recognition of net tax benefits as a result of the resolution of various tax positions related to AbbVie’s operations for years prior to the separation.
Note 5 — Assets Held for Disposition
As discussed in Note 8 - Business Acquisitions, in conjunction with the acquisition of Alere Inc. (Alere), Abbott sold the Triage® MeterPro cardiovascular and toxicology business and the assets and liabilities related to its B-type Natriuretic Peptide assay business run on Beckman Coulter analyzers to Quidel Corporation (Quidel). The legal transfer of certain assets and liabilities related to these businesses did not occur at the close of the sale to Quidel due to, among other factors, the time required to transfer marketing authorizations and other regulatory requirements in various countries. Under the terms of the sale agreement with Abbott, Quidel is subject to the risks and entitled to the benefits generated by these operations and assets. The assets presented as held for disposition in the Condensed Consolidated Balance Sheet as of September 30, 2018 and December 31, 2017, primarily relate to the businesses sold to Quidel. The decrease in net assets held for disposition primarily represents the completion of the transfer of certain assets and liabilities to Quidel.
(in millions) |
| September 30, |
| December 31, |
| ||
Trade receivables, net |
| $ | 9 |
| $ | 12 |
|
Total inventories |
| 3 |
| 8 |
| ||
Current assets held for disposition |
| 12 |
| 20 |
| ||
Net property and equipment |
| — |
| 56 |
| ||
Intangible assets, net of amortization |
| — |
| 18 |
| ||
Goodwill |
| 19 |
| 102 |
| ||
Non-current assets held for disposition |
| 19 |
| 176 |
| ||
Total assets held for disposition |
| $ | 31 |
| $ | 196 |
|
Abbott Laboratories and Subsidiaries
Notes to the Condensed Consolidated Financial Statements
September 30, 2018
(Unaudited)
Note 6 — 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 September 30, 2019 and 2018 and 2017 were $548$954 million and $558$548 million, respectively, and for the nine months ended September 30, 2019 and 2018 and 2017 were $1.669$2.622 billion and $1.211$1.669 billion, respectively. Net earnings allocated to common shares for the three months ended September 30, 2019 and 2018 and 2017 were $560$954 million and $601$560 million, respectively, and for the nine months ended September 30, 2019 and 2018 were $2.622 billion and 2017 were $1.704 billion, and $1.299 billion, respectively.
Other, net in Net cash from operating activities in the Condensed Consolidated Statement of Cash Flows for the first nine months of 2019 includes $337 million of pension contributions and the payment of cash taxes of approximately $775 million. The first nine months of 2018 includes the favorable impact of improvements in working capital management, as well as the effect of non-cash charges related to the impairment of certain assets and the accrual of certain debt extinguishment costs. The first nine months of 2017 includes the effects of contributions to defined benefit plans of $335 million. The first nine months of 2017 also includes the impact of improved working capital management and approximately $435 million of tax expense related to business dispositions.
In February 2017, Abbott completed the sale of Abbott Medical Optics (AMO) to Johnson & Johnson and recognized a pre-tax gain of $1.163 billion, which is reported in Other (income) expense, net within the Condensed Consolidated Statement of Earnings in the first nine months of 2017. Abbott recorded an after-tax gain of $728 million in the first nine months of 2017 related to the sale of AMO. The operating results of AMO up through the date of sale continued to be included in Earnings from Continuing Operations as they did not qualify for reporting as discontinued operations. For the first nine months ended September 30, 2017, the AMO losses before taxes included in Abbott’s consolidated earnings were $18 million.
In the first nine months of 2017, Abbott sold 51 million ordinary shares of Mylan N.V. received upon the sale of its developed markets branded generics pharmaceuticals business to Mylan Inc. Abbott received $1.977 billion in proceeds from the sale of these shares. Abbott recorded an immaterial pre-tax gain in the first nine months of 2017, which was recognized in the Other (income) expense, net line of the Condensed Consolidated Statement of Earnings.
The components of long-term investments as of September 30, 20182019 and December 31, 20172018 are as follows:
Long-term Investments |
| September 30, |
| December 31, |
| ||||||||
| | | | | | | |||||||
| | September 30, | | December 31, | |||||||||
(in millions) |
| 2018 |
| 2017 |
|
| 2019 |
| 2018 | ||||
Long-term Investments: | | | | | | | |||||||
Equity securities |
| $ | 934 |
| $ | 797 |
| | $ | 830 | | $ | 856 |
Other |
| 37 |
| 86 |
| | | 44 | | | 41 | ||
Total |
| $ | 971 |
| $ | 883 |
|
| $ | 874 |
| $ | 897 |
Abbott’s
11
Abbott Laboratories and Subsidiaries
Notes to the Condensed Consolidated Financial Statements
September 30, 2019
(Unaudited)
Abbott's equity securities as of September 30, 2018,2019, include approximately $350$330 million of investments in mutual funds that are held in a rabbi trust and were acquired as part of the St. Jude Medical, Inc. (St. Jude Medical) business acquisition. These investments, which are specifically designated as available for the purpose of paying benefits under a deferred compensation plan, are not available for general corporate purposes and are subject to creditor claims in the event of insolvency.
Abbott also holds certain investments as of September 30, 20182019 with a carrying value of approximately $355$335 million that are accounted for under the equity method of accounting and other equity investments with a carrying value of approximately $220$155 million that do not have a readily determinable fair value. The $220$155 million carrying value includes ancumulative unrealized gaingains of approximately $50 million.
In the first quarter of 2019, in conjunction with the acquisition of Cephea Valve Technologies, Inc., Abbott acquired a research & development (R&D) asset valued at $102 million, on an investment.which was immediately expensed. The gain$102 million of expense was recorded in the second quarterR&D line of 2018 and relates to an observable price change for a similar investment of the same issuer.
Abbott Laboratories and Subsidiaries
Notes to theAbbott's Condensed Consolidated Financial StatementsStatement of Earnings.
September 30, 2018
(Unaudited)
Note 7 5 — Changes in Accumulated Other Comprehensive Income (Loss)
The changes in accumulated other comprehensive income (loss), net of income taxes, are as follows:
|
| Three Months Ended September 30 |
| ||||||||||||||||||||||||||||||||||||||||||||||
|
| Cumulative Foreign |
| Net Actuarial |
| Cumulative |
| Cumulative Gains Derivative |
| ||||||||||||||||||||||||||||||||||||||||
| | | | | | | | | | | | | | | | | | | | | | | | | |||||||||||||||||||||||||
| | Three Months Ended September 30 | |||||||||||||||||||||||||||||||||||||||||||||||
| | | | | | | | | | | | | | | | | | | | Cumulative Gains | |||||||||||||||||||||||||||||
| | | | | | | | | | | | | | Cumulative | | (Losses) on | |||||||||||||||||||||||||||||||||
| | | | | | | | Net Actuarial | | Unrealized Gains | | Derivative | |||||||||||||||||||||||||||||||||||||
| | Cumulative Foreign | | (Losses) and Prior | | (Losses) on | | Instruments | |||||||||||||||||||||||||||||||||||||||||
| | Currency Translation | | Service (Costs) | | Marketable Equity | | Designated as | |||||||||||||||||||||||||||||||||||||||||
(in millions) |
| 2018 |
| 2017 |
| 2018 |
| 2017 |
| 2018 |
| 2017 |
| 2018 |
| 2017 |
| | Adjustments | | and Credits | | Securities | | Cash Flow Hedges | ||||||||||||||||||||||||
|
| 2019 |
| 2018 |
| 2019 |
| 2018 |
| 2019 |
| 2018 |
| 2019 |
| 2018 | |||||||||||||||||||||||||||||||||
Balance at June 30 |
| $ | (4,478 | ) | $ | (3,996 | ) | $ | (2,437 | ) | $ | (2,215 | ) | $ | — |
| $ | 13 |
| $ | 2 |
| $ | (52 | ) | | $ | (4,699) | | $ | (4,478) | | $ | (2,677) | | $ | (2,437) | | $ | — | | $ | — | | $ | 11 | | $ | 2 |
Other comprehensive income (loss) before reclassifications |
| (153 | ) | 285 |
| — |
| — |
| — |
| (136 | ) | 10 |
| (44 | ) | |
| (478) | |
| (153) | | | 7 | |
| — | |
| — | |
| — | |
| 67 | |
| 10 | ||||||||
Amounts reclassified from accumulated other comprehensive income |
| — |
| — |
| 22 |
| 23 |
| — |
| — |
| 25 |
| 6 |
| |
| — | |
| — | |
| 24 | |
| 22 | |
| — | |
| — | |
| (18) | |
| 25 | ||||||||
Net current period comprehensive income (loss) |
| (153 | ) | 285 |
| 22 |
| 23 |
| — |
| (136 | ) | 35 |
| (38 | ) | |
| (478) | |
| (153) | |
| 31 | |
| 22 | |
| — | |
| — | |
| 49 | |
| 35 | ||||||||
Balance at September 30 |
| $ | (4,631 | ) | $ | (3,711 | ) | $ | (2,415 | ) | $ | (2,192 | ) | $ | — |
| $ | (123 | ) | $ | 37 |
| $ | (90 | ) | | $ | (5,177) | | $ | (4,631) | | $ | (2,646) | | $ | (2,415) | | $ | — | | $ | — | | $ | 60 | | $ | 37 |
|
| Nine Months Ended September 30 |
| ||||||||||||||||||||||||||||||||||||||||||||||
|
| Cumulative Foreign |
| Net Actuarial |
| Cumulative |
| Cumulative Gains |
| ||||||||||||||||||||||||||||||||||||||||
| | | | | | | | | | | | | | | | | | | | | | | | | |||||||||||||||||||||||||
| | Nine Months Ended September 30 | |||||||||||||||||||||||||||||||||||||||||||||||
| | | | | | | | Cumulative Gains | |||||||||||||||||||||||||||||||||||||||||
| | | | | | Cumulative | | (Losses) on | |||||||||||||||||||||||||||||||||||||||||
| | | | Net Actuarial | | Unrealized Gains | | Derivative | |||||||||||||||||||||||||||||||||||||||||
| | Cumulative Foreign | | (Losses) and Prior | | (Losses) on | | Instruments | |||||||||||||||||||||||||||||||||||||||||
| | Currency Translation | | Service (Costs) | | Marketable Equity | | Designated as | |||||||||||||||||||||||||||||||||||||||||
(in millions) |
| 2018 |
| 2017 |
| 2018 |
| 2017 |
| 2018 |
| 2017 |
| 2018 |
| 2017 |
| | Adjustments |
| and Credits |
| Securities |
| Cash Flow Hedges | ||||||||||||||||||||||||
Balance at December 31, 2017 and 2016 |
| $ | (3,452 | ) | $ | (4,959 | ) | $ | (2,521 | ) | $ | (2,284 | ) | $ | (5 | ) | $ | (69 | ) | $ | (84 | ) | $ | 49 |
| ||||||||||||||||||||||||
Reclassified to Earnings employed in the business for adoption of ASU 2016-01 |
| — |
| — |
| — |
| — |
| 5 |
| — |
| — |
| — |
| ||||||||||||||||||||||||||||||||
Impact of business dispositions |
| — |
| 142 |
| — |
| 6 |
| — |
| — |
| — |
| 1 |
| ||||||||||||||||||||||||||||||||
|
| 2019 |
| 2018 |
| 2019 |
| 2018 |
| 2019 |
| 2018 |
| 2019 |
| 2018 | |||||||||||||||||||||||||||||||||
Balance at December 31 , 2018 and 2017 | | $ | (4,912) | | $ | (3,452) | | $ | (2,726) | | $ | (2,521) | | $ | — | | $ | (5) | | $ | 52 | | $ | (84) | |||||||||||||||||||||||||
Impact of adoption of new accounting standard | | | — | |
| — | |
| — | |
| — | |
| — | |
| 5 | |
| — | |
| — | |||||||||||||||||||||||||
Other comprehensive income (loss) before reclassifications |
| (1,179 | ) | 1,106 |
| — |
| — |
| — |
| 47 |
| 38 |
| (151 | ) | |
| (265) | |
| (1,179) | |
| 9 | |
| — | |
| — | |
| — | |
| 48 | |
| 38 | ||||||||
Amounts reclassified from accumulated other comprehensive income |
| — |
| — |
| 106 |
| 86 |
| — |
| (101 | ) | 83 |
| 11 |
| |
| — | | | — | |
| 71 | |
| 106 | |
| — | |
| — | |
| (40) | |
| 83 | ||||||||
Net current period comprehensive income (loss) |
| (1,179 | ) | 1,106 |
| 106 |
| 86 |
| — |
| (54 | ) | 121 |
| (140 | ) | |
| (265) | |
| (1,179) | |
| 80 | |
| 106 | |
| — | |
| — | |
| 8 | |
| 121 | ||||||||
Balance at September 30 |
| $ | (4,631 | ) | $ | (3,711 | ) | $ | (2,415 | ) | $ | (2,192 | ) | $ | — |
| $ | (123 | ) | $ | 37 |
| $ | (90 | ) | | $ | (5,177) | | $ | (4,631) | | $ | (2,646) | | $ | (2,415) | | $ | — | | $ | — | | $ | 60 | | $ | 37 |
Reclassified amounts for foreign currency translation are recorded in the Condensed Consolidated Statement of Earnings as Net foreign exchange (gain) loss; gains (losses) on marketable equity securities as Other (income) expense, netloss and cash flow hedges as Cost of products sold. Net actuarial losses and prior service cost are included as a component of net periodic benefit plan costs; see Note 1513 for additional details.
12
Abbott Laboratories and Subsidiaries
Notes to the Condensed Consolidated Financial Statements
September 30, 20182019
(Unaudited)
Note 8 — Business Acquisitions
On January 4, 2017, Abbott completed the acquisition of St. Jude Medical, a global medical device manufacturer, for approximately $23.6 billion, including approximately $13.6 billion in cash and approximately $10 billion in Abbott common shares, which represented approximately 254 million shares of Abbott common stock, based on Abbott’s closing stock price on the acquisition date. As part of the acquisition, approximately $5.9 billion of St. Jude Medical’s debt was assumed, repaid or refinanced by Abbott. The acquisition provides expanded opportunities for future growth and is an important part of the company’s ongoing effort to develop a strong, diverse portfolio of devices, diagnostics, nutritionals and branded generic pharmaceuticals. The combined business competes in nearly every area of the cardiovascular device market, as well as in the neuromodulation market.
Under the terms of the agreement, for each St. Jude Medical common share, St. Jude Medical shareholders received $46.75 in cash and 0.8708 of an Abbott common share. At an Abbott stock price of $39.36, which reflects the closing price on January 4, 2017, this represented a value of approximately $81 per St. Jude Medical common share and total purchase consideration of $23.6 billion. The cash portion of the acquisition was funded through a combination of medium and long-term debt issued in November 2016 and a $2.0 billion 120-day senior unsecured bridge term loan facility which was subsequently repaid.
In 2016, Abbott and St. Jude Medical agreed to sell certain businesses to Terumo Corporation (Terumo) for approximately $1.12 billion. The sale included the St. Jude Medical Angio-Seal™ and Femoseal™ vascular closure and Abbott’s Vado® Steerable Sheath businesses. The sale closed on January 20, 2017 and no gain or loss was recorded in the Condensed Consolidated Statement of Earnings.
On October 3, 2017, Abbott acquired Alere, a diagnostic device and service provider, for $51.00 per common share in cash, which equated to a purchase price of approximately $4.5 billion. As part of the acquisition, Abbott tendered for Alere’s preferred shares for a total value of approximately $0.7 billion. In addition, approximately $3.0 billion of Alere’s debt was assumed and subsequently repaid. The acquisition establishes Abbott as a leader in point of care testing, expands Abbott’s global diagnostics presence and provides access to new products, channels and geographies. Abbott utilized a combination of cash on hand and debt to fund the acquisition.
The final allocation of the fair value of the Alere acquisition is shown in the table below:
(in billions) |
|
|
| |
Acquired intangible assets, non-deductible |
| $ | 3.5 |
|
Goodwill, non-deductible |
| 3.7 |
| |
Acquired net tangible assets |
| 1.0 |
| |
Deferred income taxes recorded at acquisition |
| (0.4 | ) | |
Net debt |
| (2.6 | ) | |
Preferred stock |
| (0.7 | ) | |
Total allocation of fair value |
| $ | 4.5 |
|
The goodwill is primarily attributable to expected synergies from combining operations, as well as intangible assets that do not qualify for separate recognition. The goodwill is identifiable to the Diagnostic Products reportable segment. The approximate value of the acquired tangible assets is $430 million of trade accounts receivable, $425 million of inventory, $225 million of other current assets, $540 million of property and equipment, and $210 million of other long-term assets. The approximate value of the acquired tangible liabilities is $675 million of trade accounts payable and other current liabilities and $145 million of other non-current liabilities.
In the third quarter of 2017, Alere entered into agreements to sell its Triage MeterPro cardiovascular and toxicology business and the assets and liabilities related to its B-type Natriuretic Peptide assay business run on Beckman Coulter analyzers to Quidel. The transactions with Quidel reflect a total purchase price of $400 million payable at the close of the transaction, $240 million payable in six annual installments beginning approximately six months after the close of the transaction, and contingent consideration with a maximum value of $40 million. In the third quarter of 2017, Alere entered into an agreement with Siemens Diagnostics Holding II B.V. (Siemens) to sell its subsidiary, Epocal Inc., for approximately $200 million payable at the close of the transaction. Alere agreed to divest these businesses in connection with the review by the Federal Trade Commission and the European Commission of Abbott’s agreement to acquire Alere. The sale to Quidel closed on October 6 2017, and the sale to Siemens closed on October 31, 2017. No gain or loss on these sales was recorded in the Condensed Consolidated Statement of Earnings.
Abbott Laboratories and Subsidiaries
Notes to the Condensed Consolidated Financial Statements
September 30, 2018
(Unaudited)
On July 17, 2017, Abbott commenced a tender offer to purchase for cash the 1.77 million outstanding shares of Alere’s Series B Convertible Perpetual Preferred Stock at a price of $402 per share, plus accrued but unpaid dividends to, but not including, the settlement date of the tender offer. This tender offer was subject to the satisfaction of certain conditions, including Abbott’s acquisition of Alere and upon there being validly tendered (and not properly withdrawn) at the expiration date of the tender offer that number of shares of Preferred Stock that equaled at least a majority of the Preferred Stock issued and outstanding at the expiration of the tender offer. The tender offer expired on October 3, 2017. All conditions to the offer were satisfied and Abbott accepted for payment the 1.748 million shares of Preferred Stock that were validly tendered (and not properly withdrawn). The remaining shares were cashed out for an amount equal to the $400.00 per share liquidation preference of such shares, plus accrued but unpaid dividends, without interest. Payment for all of the shares of Preferred Stock was made in the fourth quarter of 2017.
Note 9 — Goodwill and Intangible Assets
The total amount of goodwill reported was $23.4$23.0 billion at September 30, 20182019 and $24.0$23.3 billion at December 31, 2017. The amounts reported at September 30, 2018 and December 31, 2017 exclude goodwill reported in non-current assets held for disposition.2018. Foreign currency translation adjustments decreased goodwill by approximately $277$252 million induring the first nine months of 2018. Purchase price accounting adjustments associated with the Alere acquisition decreased goodwill by $326 million in the first nine months of 2018.2019. The amount of goodwill related to reportable segments at September 30, 20182019 was $3.1$3.0 billion for the Established Pharmaceutical Products segment, $286 million for the Nutritional Products segment, $3.7 billion for the Diagnostic Products segment, and $15.4$15.2 billion for the Cardiovascular and Neuromodulation Products segment. There was no0 reduction of goodwill relating to impairments in the first nine months of 2018.2019.
The gross amount of amortizable intangible assets, primarily product rights and technology was $25.7$25.1 billion as of September 30, 20182019 and $25.6$25.7 billion as of December 31, 2017,2018, and accumulated amortization was $9.8$11.2 billion as of September 30, 20182019 and $8.1$10.4 billion as of December 31, 2017. Purchase price allocation adjustments increased intangible assets by $280 million and foreign2018. Foreign currency translation adjustments decreased intangible assets by $225approximately $110 million during the first nine months of 2018. The September 30, 2018 and December 31, 2017 amounts exclude net intangible assets reported in non-current assets held for disposition.2019. Abbott’s estimated annual amortization expense for intangible assets is approximately $2.4 billion in 2018, $2.3$1.9 billion in 2019, $2.1 billion in 2020, $2.0 billion in 2021, $2.0 billion in 2022 and $2.0 billion in 2022. Amortizable intangible assets are amortized over 2 to 20 years (weighted average 12 years).2023.
Indefinite-lived intangible assets, which relate to in-process research and development acquired in a business combination, were approximately $3.6 billion and $3.9 billion as of September 30, 20182019 and December 31, 2017, respectively. The decrease in indefinite-lived intangible assets during the first nine months of 2018 primarily relates to purchase price allocation adjustments associated with the Alere acquisition..
Note 107 — Restructuring Plans
InFrom 2017 and 2018,to 2019, Abbott management approved restructuring plans as part of the integration of the acquisitionacquisitions of St. Jude Medical into the Cardiovascular and Neuromodulation segment, and Alere Inc. (Alere) into the Diagnostics segment, in order to leverage economies of scale and reduce costs. In the first nine months of 2018,2019, charges of $45$66 million including one-time employee termination benefits were recognized, of which $4$18 million is recorded in Cost of products sold, $10$4 million is recorded in Research and development and $31$44 million as Selling, general and administrative expense. The following summarizes the activity for the first nine months of 20182019 related to these actions and the status of the related accrual as of September 30, 2018:2019:
(in millions) |
|
|
| |
Accrued balance at December 31, 2017 |
| $ | 68 |
|
Restructuring charges recorded in 2018 |
| 45 |
| |
Payments and other adjustments |
| (58 | ) | |
Accrued balance at September 30, 2018 |
| $ | 55 |
|
| | | |
(in millions) |
| | |
Accrued balance at December 31, 2018 | | $ | 41 |
Restructuring charges recorded in 2019 | | | 66 |
Payments and other adjustments | | | (45) |
Accrued balance at September 30, 2019 | | $ | 62 |
Abbott Laboratories and Subsidiaries
Notes to the Condensed Consolidated Financial Statements
September 30, 2018
(Unaudited)
From 20142016 to 2018,2019, Abbott management approved plans to streamline operations in order to reduce costs and improve efficiencies in various Abbott businesses, including the nutritional, established pharmaceuticals and vascular businesses. In the first nine months of 2018,2019, charges of $18$35 million were recognized, of which $8$10 million is recorded in Cost of products sold, $1$8 million is recorded in Research and development and $9$17 million as Selling, general and administrative expense. The following summarizes the activity for the first nine months of 20182019 related to these restructuring actions and the status of the related accrual as of September 30, 2018:2019:
(in millions) |
|
|
| |
Accrued balance at December 31, 2017 |
| $ | 141 |
|
Restructuring charges recorded in 2018 |
| 18 |
| |
Payments and other adjustments |
| (72 | ) | |
Accrued balance at September 30, 2018 |
| $ | 87 |
|
| | | |
(in millions) |
| | |
Accrued balance at December 31, 2018 | | $ | 70 |
Restructuring charges recorded in 2019 | | | 35 |
Payments and other adjustments | | | (29) |
Accrued balance at September 30, 2019 | | $ | 76 |
Note 118 — Incentive Stock Programs
In the first nine months of 2018,2019, Abbott granted 5,760,2214,579,283 stock options, 871,331736,100 restricted stock awards and 7,995,5816,568,376 restricted stock units under its incentive stock programs. At September 30, 2018,2019, approximately 144126 million shares were reserved for future grants. Information regarding the number of options outstanding and exercisable at September 30, 20182019 is as follows:
|
| Outstanding |
| Exercisable |
| ||||||||
| | | | | | | |||||||
|
| Outstanding |
| Exercisable | |||||||||
Number of shares |
| 33,984,922 |
| 21,496,161 |
|
|
| 30,219,778 | |
| 20,793,077 | ||
Weighted average remaining life (years) |
| 6.5 |
| 5.5 |
|
|
| 6.5 | |
| 5.5 | ||
Weighted average exercise price |
| $ | 41.88 |
| $ | 38.04 |
|
| $ | 48.65 | | $ | 41.13 |
Aggregate intrinsic value (in millions) |
| $ | 1,070 |
| $ | 759 |
|
| $ | 1,058 | | $ | 885 |
The total unrecognized share-based compensation cost at September 30, 2018 amounted to approximately $439 million which is expected to be recognized over the next three years.
13
Note 12 — Debt and Lines of Credit
On January 5, 2018, Abbott paid off its $2.8 billion 5-year term loan and the remaining $1.150 billion balance under its revolving credit agreement.
On February 16, 2018, the board of directors authorized the early redemption of up to $5 billion of outstanding long-term notes. Redemptions under this authorization include the following:
· $0.947 billion principal amount of its 5.125% Notes due 2019 — redeemed on March 22, 2018
· $1.055 billion of the $2.850 billion principal amount of its 2.35% Notes due 2019 — redeemed on March 22, 2018
· $1.300 billion of the $1.795 billion outstanding principal amount of its 2.35% Notes due 2019 — redeemed on June 22, 2018
· $0.495 billion outstanding principal amount of its 2.35% Notes due 2019 — redeemed on September 28, 2018
$1.2 billion of the $5 billion authorization remains available. Abbott incurred a net charge of $14 million related to the March 22, 2018 early repayment of debt.
On September 17, 2018, Abbott repaid upon maturity the $500 million aggregate principal amount outstanding of the 2.00% Senior Notes due 2018.
On September 27, 2018, Abbott’s wholly owned subsidiary, Abbott Ireland Financing DAC, completed a euro debt offering of €3.420 billion of long-term debt consisting of €1.140 billion of non-interest bearing Senior Notes due 2020 at 99.727% of par value; €1.140 billion of 0.875% Senior Notes due 2023 at 99.912% of par value; and €1.140 billion of 1.5% Senior Notes due 2026 at 99.723% of par value. The proceeds equated to approximately $4 billion. The notes are guaranteed by Abbott.
On October 28, 2018, Abbott redeemed $750 million principal amount of its 2.00% Notes due 2020; $597 million principal amount of its 4.125% Notes due 2020; $900 million principal amount of its 3.25% Notes due 2023; $450 million principal amount of its 3.4% Notes due 2023; and $1.300 billion principal amount of its 3.75% Notes due 2026. These amounts are in addition to the $5 billion authorization discussed above. Abbott incurred a net charge of $67 million in the third quarter of 2018 related to the early repayment of this debt.
Abbott Laboratories and Subsidiaries
Notes to the Condensed Consolidated Financial Statements
September 30, 20182019
(Unaudited)
The total unrecognized share-based compensation cost at September 30, 2019 amounted to approximately $501 million which is expected to be recognized over the next three years.
Note 139 — Debt and Lines of Credit
On February 24, 2019, Abbott redeemed the $500 million outstanding principal amount of its 2.80% Notes due 2020.
In September 2019, the board of directors authorized the early redemption of up to $5billion of outstanding long-term notes. This bond redemption authorization supersedes the board's previous authorization under which $700 million had not yet been redeemed.
Note 10 — Leases
Leases where Abbott is the Lessee
Abbott has entered into operating leases as the lessee for office space, manufacturing facilities, R&D laboratories, warehouses, vehicles and equipment. Finance leases are not significant. Abbott’s operating leases generally have remaining lease terms of 1 to 10 years. Some leases include options to extend beyond the original lease term, generally up to 10 years and some include options to terminate early. These options have been included in the determination of the lease liability when it is reasonably certain that the option will be exercised.
For all of its asset classes, Abbott elected the practical expedient allowed under FASB ASC No. 842, “Leases” to account for each lease component (e.g., the right to use office space) and the associated non-lease components (e.g., maintenance services) as a single lease component. Abbott also elected the short-term lease accounting policy for all asset classes; therefore, Abbott is not recognizing a lease liability or ROU asset for any lease that, at the commencement date, has a lease term of 12 months or less and does not include an option to purchase the underlying asset that Abbott is reasonably certain to exercise.
As Abbott’s leases typically do not provide an implicit rate, the interest rate used to determine the present value of the payments under each lease typically reflects Abbott’s incremental borrowing rate based on information available at the lease commencement date. Abbott’s incremental borrowing rates at January 1, 2019 were used for operating leases that commenced prior to January 1, 2019.
The following table provides information related to Abbott’s operating leases:
| | | | | | |
|
| Three Months Ended |
| Nine Months Ended | ||
(in millions) | | September 30, 2019 | | September 30, 2019 | ||
Operating lease cost (a) | | $ | 79 | | $ | 233 |
Cash paid for amounts included in the measurement of operating lease liabilities | | $ | 64 | | $ | 190 |
ROU assets arising from entering into new operating lease obligations | | $ | 104 | | $ | 201 |
(a) | Includes short-term lease expense and variable lease costs, which were immaterial in the three and nine months ended September 30, 2019. |
The weighted average remaining lease term and discount rate for operating leases as of September 30, 2019 were 8 years and 4.1%, respectively.
Future minimum lease payments under non-cancellable operating leases as of September 30, 2019 were as follows:
| | | |
(in millions) |
| | |
2019 | | $ | 61 |
2020 | | | 225 |
2021 | |
| 177 |
2022 | |
| 137 |
2023 | | | 98 |
Thereafter | | | 380 |
Total future minimum lease payments – undiscounted | |
| 1,078 |
Less: imputed interest | |
| (174) |
Present value of lease liabilities | | $ | 904 |
14
Abbott Laboratories and Subsidiaries
Notes to the Condensed Consolidated Financial Statements
September 30, 2019
(Unaudited)
The following table summarizes the amounts and location of operating lease ROU assets and lease liabilities as of September 30, 2019:
| | | | | |
(in millions) |
| September 30, 2019 |
| Balance Sheet Caption | |
| | | | | |
Operating Lease - ROU Asset | | $ | 881 |
| Deferred income taxes and other assets |
| | | | | |
Operating Lease Liability: | |
|
|
|
|
| | | | | |
Current | | $ | 202 |
| Other accrued liabilities |
Non-current | | | 702 |
| Post-employment obligations, deferred income taxes and other long-term liabilities |
Total Liability | | $ | 904 |
|
|
Leases where Abbott is the Lessor
Certain assets, primarily diagnostics instruments, are leased to customers under contractual arrangements that typically include an operating or sales-type lease as well as performance obligations for reagents and other consumables. Sales-type leases are not significant. Contract terms vary by customer and may include options to terminate the contract or options to extend the contract. Where instruments are provided under operating lease arrangements, some portion or the entire lease revenue may be variable and subject to subsequent non-lease component (e.g., reagent) sales. The allocation of revenue between the lease and non-lease components is based on stand-alone selling prices. Operating lease revenue represented less than 3 percent of Abbott’s total net sales in the three and nine months ended September 30, 2019.
Assets related to operating leases are reported within Net property and equipment on the Condensed Consolidated Balance Sheet. The original cost and the net book value of such assets were $2.7 billion and $1.1 billion, respectively, as of September 30, 2019.
Note 11 — 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 ratesprimarily for anticipated intercompany purchases by those subsidiaries whose functional currencies are not the U.S. dollar. These contracts, with gross notional amounts totaling $3.6$6.3 billion at September 30, 20182019 and $3.3$5.1 billion at December 31, 20172018 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 September 30, 20182019 on contracts related to intercompany purchases 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 2018 and 2017.
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, 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. At September 30, 20182019 and December 31, 2017,2018, Abbott held the gross notional amount of $15.6$10.4 billion and $20.1$13.6 billion, respectively, of such foreign currency forward exchange contracts.
Abbott is a party to interest rate hedge contracts totaling approximately $4.0$2.9 billion at September 30, 20182019 and December 31, 20172018 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. The amount
15
Table of hedge ineffectiveness was not significant in 2018Contents
Abbott Laboratories and 2017.Subsidiaries
Notes to the Condensed Consolidated Financial Statements
September 30, 2019
(Unaudited)
The following table summarizes the amounts and location of certain derivative financial instruments as of September 30, 20182019 and December 31, 2017:2018:
|
| Fair Value - Assets |
| Fair Value - Liabilities |
| ||||||||||||
(in millions) |
| Sept. 30, |
| Dec. 31, |
| Balance Sheet Caption |
| Sept. 30, |
| Dec. 31, |
| Balance Sheet Caption |
| ||||
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|
|
|
|
|
|
|
|
|
| ||||
Interest rate swaps designated as fair value hedges |
| $ | — |
| $ | — |
| Deferred income taxes and other assets |
| $ | 272 |
| $ | 93 |
| Post-employment obligations, deferred income taxes and other long-term liabilities |
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|
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|
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|
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|
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|
|
| ||||
Foreign currency forward exchange contracts: |
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|
|
|
|
|
|
|
|
|
|
|
| ||||
Hedging instruments |
| 61 |
| 21 |
| Prepaid expenses and other receivables |
| 19 |
| 106 |
| Other accrued liabilities |
| ||||
Others not designated as hedges |
| 69 |
| 117 |
| Prepaid expenses and other receivables |
| 77 |
| 99 |
| Other accrued liabilities |
| ||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
|
| $ | 130 |
| $ | 138 |
|
|
| $ | 368 |
| $ | 298 |
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| | | | | | | | | | | | | | | | |
| | Fair Value - Assets | | Fair Value - Liabilities | ||||||||||||
| | Sept. 30, | | Dec. 31, | | | | Sept. 30, | | Dec. 31, | | | ||||
(in millions) |
| 2019 |
| 2018 |
| Balance Sheet Caption |
| 2019 |
| 2018 |
| Balance Sheet Caption | ||||
| | | | | | | | | | | | | | | | |
Interest rate swaps designated as fair value hedges |
| $ | 74 |
| $ | — |
| Deferred income taxes and other assets |
| $ | — |
| $ | 100 |
| Post-employment obligations, deferred income taxes and other long-term liabilities |
| | | | | | | | | | | | | | | | |
Foreign currency forward exchange contracts: | | | | | | | | | | | | | | | | |
Hedging instruments | |
| 244 | |
| 81 |
| Prepaid expenses and other receivables | |
| 33 | |
| 44 |
| Other accrued liabilities |
Others not designated as hedges | |
| 54 | |
| 33 |
| Prepaid expenses and other receivables | |
| 62 | |
| 51 |
| Other accrued liabilities |
| | | | | | | | | | | | | | | | |
|
| $ | 372 |
| $ | 114 | | |
| $ | 95 |
| $ | 195 | | |
Abbott Laboratories and Subsidiaries
Notes to the Condensed Consolidated Financial Statements
September 30, 2018
(Unaudited)
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 certain other derivative financial instruments, as well as the amounts and location of income (expense) and gain (loss) reclassified into income for the three months and nine months ended September 30, 20182019 and 2017. The amount2018.
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Gain (loss) Recognized in Other | | Income (expense) and Gain (loss) | | | ||||||||||||||||||||
| | Comprehensive Income (loss) | | Reclassified into Income | | | ||||||||||||||||||||
| | Three Months | | Nine Months | | Three Months | | Nine Months | | | ||||||||||||||||
| | Ended Sept. 30 | | Ended Sept. 30 | | Ended Sept. 30 | | Ended Sept. 30 | | Income Statement | ||||||||||||||||
(in millions) |
| 2019 |
| 2018 |
| 2019 |
| 2018 |
| 2019 |
| 2018 |
| 2019 |
| 2018 |
| Caption | ||||||||
| | | | | | | | | | | | | | | | | | | | | | | | | | |
Foreign currency forward exchange contracts designated as cash flow hedges | | $ | 99 | | $ | 18 | | $ | 78 | | $ | 45 | | $ | 26 | | $ | (37) | | $ | 58 | | $ | (120) | | Cost of products sold |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
Interest rate swaps designated as fair value hedges | |
| n/a | |
| n/a | | | n/a | | | n/a | |
| 35 | |
| (42) | | | 174 | | | (179) | | Interest expense |
Gains of hedge ineffectiveness was not significant in 2018 and 2017 for these hedges.
|
| Gain (loss) Recognized in Other |
| Income (expense) and Gain (loss) |
|
|
| ||||||||||||||||||||
|
| Three Months |
| Nine Months |
| Three Months |
| Nine Months |
|
|
| ||||||||||||||||
(in millions) |
| 2018 |
| 2017 |
| 2018 |
| 2017 |
| 2018 |
| 2017 |
| 2018 |
| 2017 |
| Income Statement |
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Foreign currency forward exchange contracts designated as cash flow hedges |
| $ | 18 |
| $ | (57 | ) | $ | 45 |
| $ | (202 | ) | $ | (37 | ) | $ | (7 | ) | $ | (120 | ) | $ | (14 | ) | Cost of products sold |
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Debt designated as a hedge of net investment in a foreign subsidiary |
| — |
| — |
| — |
| (25 | ) | n/a |
| n/a |
| n/a |
| n/a |
| n/a |
| ||||||||
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Interest rate swaps designated as fair value hedges |
| n/a |
| n/a |
| n/a |
| n/a |
| (42 | ) | (1 | ) | (179 | ) | 13 |
| Interest expense |
| ||||||||
Losses of $10$49 million and gainslosses of $26$10 million were recognized in the three months ended September 30, 20182019 and 2017,2018, respectively, related to foreign currency forward exchange contracts not designated as a hedge. LossesGains of $60$124 million and losses of $16$60 million were recognized in the nine months ended September 30, 20182019 and 2017,2018, 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 (gain) loss 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.
16
Abbott Laboratories and Subsidiaries
Notes to the Condensed Consolidated Financial Statements
September 30, 2019
(Unaudited)
The carrying values and fair values of certain financial instruments as of September 30, 20182019 and December 31, 20172018 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.
|
| September 30, 2018 |
| December 31, 2017 |
| ||||||||||||||||||||
| | | | | | | | | | | | | |||||||||||||
| | September 30, 2019 | | December 31, 2018 | |||||||||||||||||||||
| | Carrying | | Fair | | Carrying | | Fair | |||||||||||||||||
(in millions) |
| Carrying |
| Fair |
| Carrying |
| Fair |
|
| Value |
| Value |
| Value |
| Value | ||||||||
|
|
|
|
|
|
|
|
|
| ||||||||||||||||
| | | | | | | | | | | | | |||||||||||||
Investment Securities: |
|
|
|
|
|
|
|
|
| | | | | | | | | | | | | ||||
Equity securities |
| $ | 934 |
| $ | 934 |
| $ | 797 |
| $ | 797 |
|
| $ | 830 |
| $ | 830 | | $ | 856 |
| $ | 856 |
Other |
| 37 |
| 37 |
| 86 |
| 86 |
| |
| 44 | |
| 44 | |
| 41 | |
| 41 | ||||
Total Long-term Debt |
| (23,347 | ) | (24,013 | ) | (27,718 | ) | (29,018 | ) | |
| (18,893) | |
| (21,525) | |
| (19,366) | |
| (19,871) | ||||
Foreign Currency Forward Exchange Contracts: |
|
|
|
|
|
|
|
|
| | | | | | | | | | | | | ||||
Receivable position |
| 130 |
| 130 |
| 138 |
| 138 |
| |
| 298 | |
| 298 | |
| 114 | |
| 114 | ||||
(Payable) position |
| (96 | ) | (96 | ) | (205 | ) | (205 | ) | |
| (95) | |
| (95) | |
| (95) | |
| (95) | ||||
Interest Rate Hedge Contracts: |
|
|
|
|
|
|
|
|
| | | | | | | | | | | | | ||||
Receivable position | | | 74 | | | 74 | | | — | | | — | |||||||||||||
(Payable) position |
| (272 | ) | (272 | ) | (93 | ) | (93 | ) | | | — | | | — | | | (100) | | | (100) |
The fair value of the debt was determined based on significant other observable inputs, including current interest rates.
Abbott Laboratories and Subsidiaries
Notes to the Condensed Consolidated Financial Statements
September 30, 2018
(Unaudited)
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 | ||||||||||||||||||||
| | | | | Quoted | | Significant | | | | |||||||||||||||
| | | | | Prices in | | Other | | Significant | ||||||||||||||||
| | Outstanding | | Active | | Observable | | Unobservable | |||||||||||||||||
(in millions) |
| Outstanding |
| Quoted |
| Significant |
| Significant |
|
| Balances |
| Markets |
| Inputs |
| Inputs | ||||||||
September 30, 2018: |
|
|
|
|
|
|
|
|
| ||||||||||||||||
September 30, 2019: | | | | | | | | | | | | | |||||||||||||
Equity securities |
| $ | 341 | | $ | 341 |
| $ | — |
| $ | — | |||||||||||||
Interest rate swap derivative financial instruments | |
| 74 | |
| — | |
| 74 | |
| — | |||||||||||||
Foreign currency forward exchange contracts | |
| 298 | |
| — | |
| 298 | |
| — | |||||||||||||
Total Assets |
| $ | 713 |
| $ | 341 |
| $ | 372 |
| $ | — | |||||||||||||
| | | | | | | | | | | | | |||||||||||||
Fair value of hedged long-term debt |
| $ | 2,927 | | $ | — |
| $ | 2,927 |
| $ | — | |||||||||||||
Foreign currency forward exchange contracts | | | 95 | | | — | | | 95 | | | — | |||||||||||||
Contingent consideration related to business combinations | |
| 68 | |
| — | |
| — | |
| 68 | |||||||||||||
Total Liabilities |
| $ | 3,090 |
| $ | — |
| $ | 3,022 | | $ | 68 | |||||||||||||
| | | | | | | | | | | | | |||||||||||||
December 31, 2018: | | | | | | | | | | | | | |||||||||||||
Equity securities |
| $ | 363 |
| $ | 363 |
| $ | — |
| $ | — |
|
| $ | 320 |
| $ | 320 |
| $ | — |
| $ | — |
Foreign currency forward exchange contracts |
| 130 |
| — |
| 130 |
| — |
| |
| 114 | |
| — | |
| 114 | |
| — | ||||
Total Assets |
| $ | 493 |
| $ | 363 |
| $ | 130 |
| $ | — |
|
| $ | 434 |
| $ | 320 |
| $ | 114 |
| $ | — |
|
|
|
|
|
|
|
|
|
| ||||||||||||||||
| | | | | | | | | | | | | |||||||||||||
Fair value of hedged long-term debt |
| $ | 3,730 |
| $ | — |
| $ | 3,730 |
| $ | — |
|
| $ | 2,743 |
| $ | — |
| $ | 2,743 |
| $ | — |
Interest rate swap derivative financial instruments |
| 272 |
| — |
| 272 |
| — |
| | | 100 | | | — | | | 100 | | | — | ||||
Foreign currency forward exchange contracts |
| 96 |
| — |
| 96 |
| — |
| |
| 95 | |
| — | |
| 95 | |
| — | ||||
Contingent consideration related to business combinations |
| 71 |
| — |
| — |
| 71 |
| |
| 71 | |
| — | |
| — | |
| 71 | ||||
Total Liabilities |
| $ | 4,169 |
| $ | — |
| $ | 4,098 |
| $ | 71 |
|
| $ | 3,009 |
| $ | — |
| $ | 2,938 |
| $ | 71 |
|
|
|
|
|
|
|
|
|
| ||||||||||||||||
December 31, 2017: |
|
|
|
|
|
|
|
|
| ||||||||||||||||
Equity securities |
| $ | 374 |
| $ | 374 |
| $ | — |
| $ | — |
| ||||||||||||
Foreign currency forward exchange contracts |
| 138 |
| — |
| 138 |
| — |
| ||||||||||||||||
Total Assets |
| $ | 512 |
| $ | 374 |
| $ | 138 |
| $ | — |
| ||||||||||||
|
|
|
|
|
|
|
|
|
| ||||||||||||||||
Fair value of hedged long-term debt |
| $ | 3,898 |
| $ | — |
| $ | 3,898 |
| $ | — |
| ||||||||||||
Interest rate swap derivative financial instruments |
| 93 |
| — |
| 93 |
| — |
| ||||||||||||||||
Foreign currency forward exchange contracts |
| 205 |
| — |
| 205 |
| — |
| ||||||||||||||||
Contingent consideration related to business combinations |
| 120 |
| — |
| — |
| 120 |
| ||||||||||||||||
Total Liabilities |
| $ | 4,316 |
| $ | — |
| $ | 4,196 |
| $ | 120 |
|
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.
17
Abbott Laboratories and Subsidiaries
Notes to the Condensed Consolidated Financial Statements
September 30, 2019
(Unaudited)
Note 1412 — 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 $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 $125$110 million to $165$140 million. The recorded accrual balance at September 30, 20182019 for these proceedings and exposures was approximately $145$125 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.
Abbott Laboratories and Subsidiaries
Notes to the Condensed Consolidated Financial Statements
September 30, 2018
(Unaudited)
Note 1513 — Post-Employment Benefits
Retirement plans consist of defined benefit, defined contribution, and medical and dental plans. Net periodic benefit costs, other than service costs, are recognized in the Other (income) expense, net line of the Condensed Consolidated Statement of Earnings. Net cost recognized in continuing operations for the three months and nine months ended September 30 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 |
| ||||||||||||||||||||||||||||||||||||||||||||
|
| Three Months |
| Nine Months |
| Three Months |
| Nine Months |
| ||||||||||||||||||||||||||||||||||||||||
|
| Ended September 30 |
| Ended September 30 |
| Ended September 30 |
| Ended September 30 |
| ||||||||||||||||||||||||||||||||||||||||
| | | | | | | | | | | | | | | | | | | | | | | | | |||||||||||||||||||||||||
| | Defined Benefit Plans | | Medical and Dental Plans | |||||||||||||||||||||||||||||||||||||||||||||
| | Three Months | | Nine Months | | Three Months | | Nine Months | |||||||||||||||||||||||||||||||||||||||||
(in millions) |
| 2018 |
| 2017 |
| 2018 |
| 2017 |
| 2018 |
| 2017 |
| 2018 |
| 2017 |
| | Ended September 30 | | Ended September 30 | | Ended September 30 | | Ended September 30 | ||||||||||||||||||||||||
|
| 2019 |
| 2018 |
| 2019 |
| 2018 |
| 2019 |
| 2018 |
| 2019 |
| 2018 | |||||||||||||||||||||||||||||||||
Service cost - benefits earned during the period |
| $ | 76 |
| $ | 71 |
| $ | 221 |
| $ | 213 |
| $ | 7 |
| $ | 6 |
| $ | 20 |
| $ | 19 |
| | $ | 63 | | $ | 76 | | $ | 188 | | $ | 221 | | $ | 5 | | $ | 7 | | $ | 17 | | $ | 20 |
Interest cost on projected benefit obligations |
| 77 |
| 72 |
| 232 |
| 215 |
| 12 |
| 12 |
| 36 |
| 34 |
| |
| 84 | |
| 77 | |
| 253 | |
| 232 | |
| 13 | |
| 12 | |
| 39 | |
| 36 | ||||||||
Expected return on plan assets |
| (169 | ) | (154 | ) | (511 | ) | (459 | ) | (9 | ) | (9 | ) | (25 | ) | (25 | ) | |
| (177) | |
| (169) | |
| (533) | |
| (511) | |
| (6) | |
| (9) | |
| (20) | |
| (25) | ||||||||
Net amortization of: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | ||||||||
Actuarial loss, net |
| 51 |
| 41 |
| 154 |
| 123 |
| 8 |
| 6 |
| 25 |
| 18 |
| |
| 33 | |
| 51 | |
| 99 | |
| 154 | |
| 6 | |
| 8 | |
| 17 | |
| 25 | ||||||||
Prior service cost (credit) |
| — |
| — |
| 1 |
| — |
| (11 | ) | (11 | ) | (34 | ) | (34 | ) | |
| — | |
| — | |
| 1 | |
| 1 | |
| (8) | |
| (11) | |
| (24) | |
| (34) | ||||||||
Net cost - continuing operations |
| $ | 35 |
| $ | 30 |
| $ | 97 |
| $ | 92 |
| $ | 7 |
| $ | 4 |
| $ | 22 |
| $ | 12 |
| | $ | 3 | | $ | 35 | | $ | 8 | | $ | 97 | | $ | 10 | | $ | 7 | | $ | 29 | | $ | 22 |
In the first quarter of 2018, Abbott adopted ASU 2017-07 which requires all components of pension and other postretirement benefit expense except service cost to be presented outside any subtotal of income from operations. These amounts are now classified as non-operating (income) loss. Abbott’s Condensed Consolidated Statement of Earnings was retrospectively adjusted, resulting in the reclassification of approximately $40 million and $120 million of income from the Operating earnings line to the Other (income) expense, net line in the third quarter and first nine months of 2017, respectively.
In the first nine months of 2017, Abbott recognized a $10 million curtailment gain related to the disposition of AMO.
Abbott funds its domestic defined benefit plans according to IRS funding limitations. International pension plans are funded according to similar regulations. In the first nine months of 2019 and 2018, and 2017, $71$337 million and $335$71 million, respectively, were contributed to defined benefit plans and $11 million was contributed to the post-employment medical and dental benefit plans in each year.
Note 1614 — 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 nine months of 2019, taxes on earnings from continuing operations include a $78 million reduction to the transition tax related to the Tax Cut and Jobs Act (TCJA) and approximately $95 million in excess tax benefits associated with share-based compensation. The $78 million reduction to the transition tax liability was the result of the issuance of final transition tax regulations by the U.S. Department of Treasury in the first quarter. This adjustment decreased the cumulative net tax expense related to the TCJA to $1.51 billion. In the first nine months of 2018, taxes on earnings from continuing operations include approximately $80 million in excess tax benefits associated with share-based compensation.compensation and a $53 million adjustment to the transition tax liability for associated effects related to state tax. Earnings from discontinued operations, net of tax, in the first nine months of 2018 reflect the recognition of $40 million of net tax benefits primarily as a result of the resolution of various tax positions related to prior years which decreased the gross amount of unrecognized tax benefits by $47 million. In the first nine months
18
Abbott Laboratories and Subsidiaries
Notes to the gain on the sale of the AMO business, which is taxed at a discrete tax rate. Earnings from discontinued operations, net of tax, of $88 million for the first nine months of 2017 primarily reflects the recognition of net tax benefits as a result of the resolution of various tax positions related to prior years.Condensed Consolidated Financial Statements
September 30, 2019
(Unaudited)
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 between $500$185 million and $700$430 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 20132016 are settled except for the federal income tax returns of the former Alere consolidated group which are settled through 2014.2014 and the former St. Jude Medical consolidated group which are settled through 2013.
The Tax Cuts and Jobs Act (“TCJA”) was enacted in the U.S. on December 22, 2017. The TCJA reduces the U.S. federal corporate tax rate from 35% to 21%, requires companies to pay a one-time transition tax on earnings of certain foreign subsidiaries that were previously tax deferred and creates new taxes on certain foreign sourced earnings.
Abbott Laboratories and Subsidiaries
Notes to the Condensed Consolidated Financial Statements
September 30, 2018
(Unaudited)
In the fourth quarter of 2017, Abbott recorded an estimate of net tax expense of $1.46 billion for the impact of the TCJA, which was included in Taxes on Earnings from Continuing Operations in the Consolidated Statement of Earnings. The estimate was provisional and included a charge of approximately $2.89 billion for the transition tax, partially offset by a net benefit of approximately $1.42 billion for the remeasurement of deferred tax assets and liabilities and a net benefit of approximately $10 million related to certain other impacts of the TCJA.
In the first nine months of 2018, Abbott recorded a $53 million adjustment to the provisional transition tax liability for revisions to previously recorded federal estimates and associated effects related to state tax. This adjustment increases the estimate of net tax expense for the impact of TCJA to $1.513 billion.
Given the significant complexity of the TCJA, Abbott will continue to evaluate and analyze the impact of this legislation. The $1.513 billion estimate is provisional and is based on Abbott’s latest analysis of the TCJA and may be materially adjusted in future periods due to among other things, additional analysis performed by Abbott and additional guidance that may be issued by the U.S. Department of Treasury, the Securities and Exchange Commission, or the Financial Accounting Standards Board.
Note 1715 — 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, physician offices and alternate-care testing sites. For segment reporting purposes, the Core LaboratoriesLaboratory Diagnostics, Rapid Diagnostics, Molecular Diagnostics and Point of Care Diagnostics divisions are aggregated and reported as the Diagnostic Products segment.
Cardiovascular and Neuromodulation Products — Worldwide sales of cardiac rhythm management, electrophysiology, heart failure, vascular, structural heart and neuromodulation products. For segment reporting purposes, the Cardiac Arrhythmias & Heart Failure, Vascular, Neuromodulation and Structural Heart divisions are aggregated and reported as the Cardiovascular and Neuromodulation segment.
Non-reportable segments include AMO through the date of sale and Diabetes Care.
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.
Abbott Laboratories and Subsidiaries
Notes to the Condensed Consolidated Financial Statements
September 30, 2018
(Unaudited)
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.
|
| Net Sales to External Customers |
| Operating Earnings |
| ||||||||||||||||||||
|
| Three Months |
| Nine Months |
| Three Months |
| Nine Months |
| ||||||||||||||||
|
| Ended September 30 |
| Ended September 30 |
| Ended September 30 |
| Ended September 30 |
| ||||||||||||||||
(in millions) |
| 2018 |
| 2017 |
| 2018 |
| 2017 |
| 2018 |
| 2017 |
| 2018 |
| 2017 |
| ||||||||
Established Pharmaceutical Products |
| $ | 1,159 |
| $ | 1,171 |
| $ | 3,332 |
| $ | 3,142 |
| $ | 289 |
| $ | 271 |
| $ | 664 |
| $ | 591 |
|
Nutritional Products |
| 1,838 |
| 1,768 |
| 5,452 |
| 5,141 |
| 435 |
| 403 |
| 1,224 |
| 1,146 |
| ||||||||
Diagnostic Products |
| 1,824 |
| 1,279 |
| 5,534 |
| 3,710 |
| 443 |
| 353 |
| 1,375 |
| 975 |
| ||||||||
Cardiovascular and Neuromodulation Products |
| 2,303 |
| 2,224 |
| 7,047 |
| 6,587 |
| 730 |
| 682 |
| 2,215 |
| 1,990 |
| ||||||||
Total Reportable Segments |
| 7,124 |
| 6,442 |
| 21,365 |
| 18,580 |
| 1,897 |
| 1,709 |
| 5,478 |
| 4,702 |
| ||||||||
Other |
| 532 |
| 387 |
| 1,448 |
| 1,221 |
|
|
|
|
|
|
|
|
| ||||||||
Net Sales |
| $ | 7,656 |
| $ | 6,829 |
| $ | 22,813 |
| $ | 19,801 |
|
|
|
|
|
|
|
|
| ||||
Corporate functions and benefit plans costs |
|
|
|
|
|
|
|
|
| (143 | ) | (129 | ) | (435 | ) | (326 | ) | ||||||||
Non-reportable segments |
|
|
|
|
|
|
|
|
| 148 |
| 89 |
| 365 |
| 209 |
| ||||||||
Net interest expense |
|
|
|
|
|
|
|
|
| (181 | ) | (182 | ) | (569 | ) | (569 | ) | ||||||||
Share-based compensation (a) |
|
|
|
|
|
|
|
|
| (83 | ) | (75 | ) | (396 | ) | (338 | ) | ||||||||
Amortization of intangible assets |
|
|
|
|
|
|
|
|
| (544 | ) | (501 | ) | (1,690 | ) | (1,415 | ) | ||||||||
Other, net (b) |
|
|
|
|
|
|
|
|
| (376 | ) | (285 | ) | (827 | ) | (606 | ) | ||||||||
Earnings from continuing operations before taxes |
|
|
|
|
|
|
|
|
| $ | 718 |
| $ | 626 |
| $ | 1,926 |
| $ | 1,657 |
|
19
(a)Approximately 50 percentTable of the annual net cost of share-based awards will typically be recognized in the first quarter dueContents
Abbott Laboratories and Subsidiaries
Notes to the timing of the granting of share-based awards.Condensed Consolidated Financial Statements
(b)Other, net for the nine months ended September 30, 2018 includes inventory step-up amortization. 2019
(Unaudited)
| | | | | | | | | | | | | | | | | | | | | | | | |
| | Net Sales to External Customers | | Operating Earnings | ||||||||||||||||||||
| | Three Months | | Nine Months | | Three Months | | Nine Months | ||||||||||||||||
| | Ended September 30 | | Ended September 30 | | Ended September 30 | | Ended September 30 | ||||||||||||||||
(in millions) |
| 2019 |
| 2018 |
| 2019 |
| 2018 |
| 2019 |
| 2018 |
| 2019 |
| 2018 | ||||||||
Established Pharmaceutical Products | | $ | 1,212 | | $ | 1,159 | | $ | 3,312 | | $ | 3,332 | | $ | 281 | | $ | 289 | | $ | 654 | | $ | 664 |
Nutritional Products | |
| 1,874 | |
| 1,838 | |
| 5,541 | |
| 5,452 | |
| 414 | |
| 435 | |
| 1,241 | |
| 1,224 |
Diagnostic Products | |
| 1,909 | |
| 1,824 | |
| 5,655 | |
| 5,534 | |
| 456 | |
| 443 | |
| 1,356 | |
| 1,375 |
Cardiovascular and Neuromodulation Products | |
| 2,400 | |
| 2,303 | |
| 7,202 | |
| 7,047 | |
| 741 | |
| 730 | |
| 2,179 | |
| 2,215 |
Total Reportable Segments | |
| 7,395 | |
| 7,124 | |
| 21,710 | |
| 21,365 | |
| 1,892 | |
| 1,897 | |
| 5,430 | | | 5,478 |
Other | |
| 681 | |
| 532 | |
| 1,880 | |
| 1,448 | | | | | | | | | | | | |
Net sales | | $ | 8,076 | | $ | 7,656 | | $ | 23,590 | | $ | 22,813 | | | | | | | | | | | | |
Corporate functions and benefit plan costs | | | | | | | | | | | | |
| | (131) | | | (143) | | | (332) | | | (435) |
Non-reportable segments | | | | | | | | | | | | |
| | 220 | | | 148 | | | 547 | | | 365 |
Net interest expense | | | | | | | | | | | | |
| | (143) | | | (181) | | | (437) | | | (569) |
Share-based compensation (a) | | | | | | | | | | | | |
| | (94) | | | (83) | | | (434) | | | (396) |
Amortization of intangible assets | | | | | | | | | | | | |
| | (484) | | | (544) | | | (1,453) | | | (1,690) |
Other, net (b) | | | | | | | | | | | | |
| | (157) | | | (376) | | | (484) | | | (827) |
Earnings from continuing operations before taxes | | | | | | | | | | | | | | $ | 1,103 | | $ | 718 | | $ | 2,837 | | $ | 1,926 |
(a) | Approximately 50 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) | Other, net for the three and nine months ended September 30, 2019 and 2018 includes restructuring charges and integration costs associated with the acquisitions of St. Jude Medical and Alere. Other, net for the nine months ended September 30, 2019 includes charges associated with R&D assets acquired and immediately expensed. Other, net for the nine months ended September 30, 2018 includes inventory step-up amortization. |
20
Item 2.Management’s Discussion and Analysis of Financial Condition and Results of Operations
Financial Review - Results of Operations
Abbott’s revenues are derived primarily from the sale of a 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 generic pharmaceuticals, diagnostic testing products and cardiovascular and neuromodulation products.
The following table details sales by reportable segment for the three months and nine months ended September 30. Percent changes are versus the prior year and are based on unrounded numbers.
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| Impact of |
| Total Change |
| | 2019 | | 2018 | | Change | | Exchange | | Exchange |
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Established Pharmaceutical Products |
| $ | 1,159 |
| $ | 1,171 |
| (0.9 | )% | (6.8 | )% | 5.9 | % | | $ | 1,212 | | $ | 1,159 |
| 4.4 | % | (3.5) | % | 7.9 | % |
Nutritional Products |
| 1,838 |
| 1,768 |
| 4.0 |
| (2.1 | ) | 6.1 |
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| 1,874 | |
| 1,838 |
| 2.0 |
| (1.3) |
| 3.3 | | ||
Diagnostic Products |
| 1,824 |
| 1,279 |
| 42.6 |
| (2.5 | ) | 45.1 |
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| 1,909 | |
| 1,824 |
| 4.7 |
| (1.9) |
| 6.6 | | ||
Cardiovascular and Neuromodulation Products |
| 2,303 |
| 2,224 |
| 3.6 |
| (1.2 | ) | 4.8 |
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| 2,400 | |
| 2,303 |
| 4.2 |
| (1.4) |
| 5.6 | | ||
Total Reportable Segments |
| 7,124 |
| 6,442 |
| 10.6 |
| (2.8 | ) | 13.4 |
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| 7,395 | |
| 7,124 |
| 3.8 |
| (1.8) |
| 5.6 | | ||
Other |
| 532 |
| 387 |
| 37.3 |
| (2.4 | ) | 39.7 |
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| 681 | |
| 532 |
| 28.0 |
| (3.5) |
| 31.5 | | ||
Net Sales |
| $ | 7,656 |
| $ | 6,829 |
| 12.1 |
| (2.7 | ) | 14.8 |
| | $ | 8,076 | | $ | 7,656 |
| 5.5 |
| (1.9) |
| 7.4 | |
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Total U.S. |
| $ | 2,707 |
| $ | 2,313 |
| 17.0 |
| — |
| 17.0 |
| | $ | 2,834 | | $ | 2,707 |
| 4.7 |
| — |
| 4.7 | |
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Total International |
| $ | 4,949 |
| $ | 4,516 |
| 9.6 |
| (4.1 | ) | 13.7 |
| | $ | 5,242 | | $ | 4,949 |
| 5.9 |
| (3.0) |
| 8.9 | |
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(in millions) |
| Nine Months |
| Nine Months |
| Total |
| Impact of |
| Total Change |
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Established Pharmaceutical Products |
| $ | 3,332 |
| $ | 3,142 |
| 6.1 | % | (2.2 | )% | 8.3 | % | | $ | 3,312 | | $ | 3,332 |
| (0.6) | % | (7.1) | % | 6.5 | % |
Nutritional Products |
| 5,452 |
| 5,141 |
| 6.1 |
| 0.3 |
| 5.8 |
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| 5,541 | |
| 5,452 |
| 1.6 |
| (2.8) |
| 4.4 | | ||
Diagnostic Products |
| 5,534 |
| 3,710 |
| 49.2 |
| 1.5 |
| 47.7 |
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| 5,655 | |
| 5,534 |
| 2.2 |
| (3.5) |
| 5.7 | | ||
Cardiovascular and Neuromodulation Products |
| 7,047 |
| 6,587 |
| 7.0 |
| 2.1 |
| 4.9 |
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| 7,202 | |
| 7,047 |
| 2.2 |
| (2.8) |
| 5.0 | | ||
Total Reportable Segments |
| 21,365 |
| 18,580 |
| 15.0 |
| 0.8 |
| 14.2 |
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| 21,710 | |
| 21,365 |
| 1.6 |
| (3.7) |
| 5.3 | | ||
Other |
| 1,448 |
| 1,221 |
| 18.5 |
| 3.7 |
| 14.8 |
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| 1,880 | |
| 1,448 |
| 29.9 |
| (5.7) |
| 35.6 | | ||
Net Sales |
| $ | 22,813 |
| $ | 19,801 |
| 15.2 |
| 0.9 |
| 14.3 |
| | $ | 23,590 | | $ | 22,813 |
| 3.4 |
| (3.8) |
| 7.2 | |
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Total U.S. |
| $ | 8,084 |
| $ | 6,997 |
| 15.5 |
| — |
| 15.5 |
| | $ | 8,438 | | $ | 8,084 |
| 4.4 |
| — |
| 4.4 | |
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Total International |
| $ | 14,729 |
| $ | 12,804 |
| 15.0 |
| 1.4 |
| 13.6 |
| | $ | 15,152 | | $ | 14,729 |
| 2.9 |
| (5.8) |
| 8.7 | |
Note: In order to compute results excluding the impact of exchange rates, current year U.S. dollar sales are multiplied or divided, as appropriate, by the current year average foreign exchange rates and then those amounts are multiplied or divided, as appropriate, by the prior year average foreign exchange rates.
Net sales growth in 2018,2019, excluding the impact of foreign exchange, was driven by growth in all of Abbott’s business segments and the acquisition of Alere Inc. (Alere) which closed in the fourth quarter of 2017.reportable segments. The increase in the Other category reflects growth in Abbott’s Diabetes Care business partially offset bywhere sales in the salefirst nine months of 2019 increased 30.6 percent in total and 36.5 percent, excluding the Abbott Medical Optics (AMO) businesseffects of foreign exchange, to Johnson & Johnson.$1.833 billion. The AMO business was included in Abbott’s results as a non-reportable segment through February 27, 2017, the date of the divestiture. Double-digit growth in Diabetes Care sales growth was led by FreeStyle Libre® Libre,, Abbott’s sensor-based continuous glucose monitoring (CGM) system with worldwide sales of $1.308 billion, which removesreflected an increase versus the need for routine fingersticks for people with diabetes.prior year of 65.4 percent in total and 72.9 percent, excluding the effects of foreign exchange.
Excluding the impact21
Excluding the impact of foreign exchange, total net sales increased 7.87.4 percent in the third quarter of 20182019 and 7.67.2 percent in the first nine months of 2018. Sales related to these divestitures totaled $187 million in the first nine months of 2017.2019. Abbott’s net sales were unfavorably impacted by changes in foreign exchange rates induring the third quarter as theperiod compared to 2018. The relatively stronger U.S. dollar decreased total international sales by 4.13.0 percent and total sales by 2.7 percent. Abbott’s net1.9 percent in the third quarter of 2019. The relatively stronger U.S. dollar decreased total international sales were favorably impacted by changes in foreign exchange rates5.8 percent and total sales by 3.8 percent in the first nine months of 2018 as the relatively weaker U.S. dollar increased total international sales by 1.4 percent and total sales by 0.9 percent.2019.
The table below provides detail by sales category for the nine months ended September 30. Percent changes are versus the prior year and are based on unrounded numbers.
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(in millions) |
| September |
| September |
| Total |
| Impact of |
| Total Change |
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Established Pharmaceutical Products — |
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Key Emerging Markets |
| $ | 2,525 |
| $ | 2,413 |
| 4.6 | % | (3.9 | )% | 8.5 | % | | $ | 2,496 | | $ | 2,525 |
| (1.2) | % | (8.6) | % | 7.4 | % |
Other Emerging Markets |
| 807 |
| 729 |
| 10.8 |
| 3.5 |
| 7.3 |
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| 816 | |
| 807 |
| 1.0 |
| (2.7) |
| 3.7 | | ||
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Nutritionals — |
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International Pediatric Nutritionals |
| 1,708 |
| 1,562 |
| 9.3 |
| 0.8 |
| 8.5 |
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| 1,718 | |
| 1,708 |
| 0.6 |
| (4.2) |
| 4.8 | | ||
U.S. Pediatric Nutritionals |
| 1,376 |
| 1,327 |
| 3.7 |
| — |
| 3.7 |
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| 1,406 | |
| 1,376 |
| 2.2 |
| — |
| 2.2 | | ||
International Adult Nutritionals |
| 1,431 |
| 1,317 |
| 8.7 |
| 0.2 |
| 8.5 |
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| 1,502 | |
| 1,431 |
| 4.9 |
| (5.7) |
| 10.6 | | ||
U.S. Adult Nutritionals |
| 937 |
| 935 |
| 0.2 |
| — |
| 0.2 |
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| 915 | |
| 937 |
| (2.4) |
| — |
| (2.4) | | ||
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Diagnostics — |
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Core Laboratory |
| 3,233 |
| 2,964 |
| 9.1 |
| 1.7 |
| 7.4 |
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| 3,407 | |
| 3,233 |
| 5.4 |
| (4.6) |
| 10.0 | | ||
Molecular |
| 361 |
| 341 |
| 5.8 |
| 1.3 |
| 4.5 |
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| 326 | |
| 361 |
| (9.5) |
| (2.5) |
| (7.0) | | ||
Point of Care |
| 416 |
| 405 |
| 2.5 |
| 0.3 |
| 2.2 |
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| 424 | |
| 416 |
| 2.1 |
| (0.5) |
| 2.6 | | ||
Rapid Diagnostics |
| 1,524 |
| — |
| n/m |
| n/m |
| n/m |
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| 1,498 | |
| 1,524 |
| (1.7) |
| (2.3) |
| 0.6 | | ||
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Cardiovascular and Neuromodulation — |
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Rhythm Management |
| 1,586 |
| 1,574 |
| 0.8 |
| 2.0 |
| (1.2 | ) | |
| 1,600 | |
| 1,667 |
| (4.0) |
| (2.8) |
| (1.2) | | ||
Electrophysiology |
| 1,225 |
| 1,001 |
| 22.3 |
| 2.3 |
| 20.0 |
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| 1,262 | |
| 1,144 |
| 10.3 |
| (2.8) |
| 13.1 | | ||
Heart Failure |
| 468 |
| 471 |
| (0.6 | ) | 0.9 |
| (1.5 | ) | |
| 571 | |
| 468 |
| 22.0 |
| (1.5) |
| 23.5 | | ||
Vascular |
| 2,209 |
| 2,158 |
| 2.4 |
| 2.3 |
| 0.1 |
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Vascular (a) | |
| 2,136 | |
| 2,209 |
| (3.3) |
| (3.0) |
| (0.3) | | |||||||||||||
Structural Heart |
| 913 |
| 793 |
| 15.2 |
| 3.0 |
| 12.2 |
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| 1,024 | |
| 913 |
| 12.1 |
| (3.8) |
| 15.9 | | ||
Neuromodulation |
| 646 |
| 590 |
| 9.5 |
| 0.8 |
| 8.7 |
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| 609 | |
| 646 |
| (5.7) |
| (1.4) |
| (4.3) | | ||
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(a) Vascular Product Lines: | | | | | | | | | | | | | | |||||||||||||
Coronary and Endovascular | | | 2,049 | | | 2,085 | | (1.7) | | (3.1) | | 1.4 | |
Note: Insertable Cardiac Monitor (ICM) sales, which had previously been reported in Electrophysiology, are now included in Rhythm Management. Historic periods have been adjusted to reflect this change.
Key Emerging Markets for the Established Pharmaceutical Products business include India, Russia, Brazil and China, along with several other markets that represent the most attractive long-term growth opportunities for Abbott’s branded generics product portfolio. SalesExcluding the unfavorable effect of foreign exchange, sales in the Key Emerging Markets increased 8.57.4 percent compared to the first nine months of 2017, excluding2018 due to growth across several geographies including India, Russia, China and Brazil. Excluding the unfavorable effect of foreign exchange, duesales in Other Emerging Markets increased 3.7 percent compared to double-digitthe first nine months of 2018. Sales growth across several geographies including India and China.in Other Emerging Markets was negatively impacted in the first nine months of 2019 by the discontinuation of a non-core, low-margin agreement under which Abbott supplied product to a third party.
The 8.54.8 percent increase in International Pediatric Nutritional sales, excluding the effect of foreign exchange, was primarily driven by double-digit growth across severalin various countries in Asia.Asia and Latin America across Abbott’s portfolio, including PediaSure® and Pedialyte®. This growth was partially offset by challenging market dynamics in the Greater China infant category. In the U.S., the 3.72.2 percent increase in Pediatric Nutritional sales reflects growth in Pedialyte volume and market share gains in the infant nutrition category.PediaSure. The 8.510.6 percent increase in International Adult Nutritional sales, excluding the effect of foreign exchange, reflects continued strong growth of the Ensure® and Glucerna® brands in Asia and Latin America.several countries. In the U.S. Adult Nutritional business, growth of Ensure products was offset bythe decline reflects Abbott’s wind downdiscontinuation of a non-core product line.line during the third quarter of 2018.
The 47.75.7 percent increase in Diagnostics sales, excluding the effect of foreign exchange, was primarily driven by Alere which was acquired in the fourth quarter of 2017. Excluding the impact of the acquisition, as well as the impact of foreign exchange, sales in Diagnostics increased 6.6 percent, reflecting above-market growth in Core Laboratory in the U.S. and internationally.
The 4.9 percent increase in Cardiovascular and NeuromodulationDiagnostic Products sales, excluding the effect of foreign exchange, was driven by above-market growth in Core Laboratory in the U.S., and internationally where Abbott is achieving continued adoption of its Alinity® family of diagnostic instruments. In July 2019, Abbott received U.S. Food and Drug Administration (FDA) approval for its Alinity blood and plasma screening system. The 7.0 percent decrease in Molecular sales, excluding the effect of foreign exchange, reflects the negative impact of lower non-governmental organization purchases in Africa. In March 2019, Abbott announced that it obtained CE Mark for its Alinity molecular diagnostics system and several testing assays. In Rapid Diagnostics, sales growth in several areas, including cardio-metabolic testing, was mostly offset by lower than expected infectious disease testing sales in Africa.
22
Excluding the effect of foreign exchange, total Cardiovascular and Neuromodulation Products sales grew 5.0 percent; the increase was driven by double-digit growth in Electrophysiology, Heart Failure and Structural Heart and Neuromodulation.
Heart. The growth in Electrophysiology was led by strong performance inreflects higher sales of cardiac mappingdiagnostic and ablation catheters as well asin both the U.S. launch of Abbott’s Confirm RxTM Insertable Cardiac Monitor (ICM), the world’s first and only smartphone-compatible ICM designed to help physicians remotely identify cardiac arrhythmias.internationally. In May 2018, Abbott announced U.S. FDA clearance of the AdvisorTM HD Grid Mapping Catheter, Sensor EnabledTM, which creates detailed maps of the heart and expands Abbott’s electrophysiology product portfolio.
Growth in Structural Heart was driven by several product areas including the AMPLATZERTM PFO Occluder and MitraClip®, Abbott’s market-leading device for the minimally-invasive treatment of mitral regurgitation. In July,January 2019, Abbott announced U.S. FDA approval for a next-generation version of MitraClip. In September, Abbott announced positive clinical results from its COAPT study, which demonstrated that MitraClip improved survival and clinical outcomes for select patients with functional mitral regurgitation. The COAPT study data will be submitted to the U.S. FDA to request approval of an expanded indication for MitraClip.
The growth in Neuromodulation reflects higher revenue for various products for the treatment of chronic pain and movement disorders.
In Vascular, growth in vessel closure and other revenues was partially offset by lower drug eluting stent sales due to lower U.S. market share and price erosion in various markets. During the second quarter of 2018, Abbott received approval from the U.S. FDA for XIENCETM Sierra, the newest generation of its coronary stent system. During the second quarterTactiCath® contact force ablation catheter, Sensor Enabled™, which is designed to help physicians treat atrial fibrillation, a form of 2018, XIENCE Sierra also received national reimbursement in Japan to treat people with coronary artery disease. In Rhythm Management, market share gains in the new patient segment were offset by replacement cycle dynamics. irregular heartbeat.
In Heart Failure, international sales growth was offsetdriven by lower U.S. sales. In October 2018,rapid market adoption in the U.S.of Abbott’s HeartMate 3TM® Left Ventricular Assist Device (LVAD) received U.S.following FDA approval in October 2018 as a destination (long-term use) therapy for people living with advanced heart failure. In March 2019, Abbott announced new data from its MOMENTUM 3 clinical study, the largest randomized controlled trial to assess outcomes in patients receiving a heart pump to treat advanced heart failure, which demonstrated HeartMate 3 improved survival and clinical outcomes in this patient population.
Growth in Structural Heart was broad-based across several areas of the business, including MitraClip®, Abbott's market-leading device for the minimally invasive treatment of mitral regurgitation (MR), a leaky heart valve. During the first quarter of 2019, Abbott received U.S. FDA approval for a new, expanded indication for MitraClip to treat clinically significant secondary MR as a result of underlying heart failure. This new indication expands the number of people with MR that can be treated with the MitraClip device. In July 2019, Abbott received U.S. FDA approval of the next generation of its MitraClip device, which includes a new leaflet grasping enhancement, an expanded range of clip sizes and facilitation of procedure assessment in real time to offer doctors further options when treating mitral valve disease.
In Vascular, excluding the effect of foreign exchange, revenues were basically flat as the 1.4 percent increase in coronary and endovascular product sales, which includes drug-eluting stents, balloon catheters, guidewires, vascular imaging/diagnostics products, vessel closure, carotid and other coronary and peripheral products, was offset primarily by a reduction in royalty revenue. In Rhythm Management, the 1.2 percent decline in revenues, excluding the effect of foreign exchange, reflects a 6.3 percent decrease in U.S. sales partially offset by a 4.0 percent increase in international sales. The 4.3 percent decline in Neuromodulation sales, excluding the effect of foreign exchange, reflects a 5.4 percent decline in U.S. sales.
The gross profit margin percentage was 52.4 percent for the third quarter of 2019 compared to 51.5 percent for the third quarter of 2018 compared to 50.6 percent for the third quarter of 2017.2018. The gross profit margin percentage was 52.3 percent for the first nine months of 2019 compared to 50.9 percent for the first nine months of 2018 compared to 46.8 percent for2018. The increase in the first nine months of 2017. The increase2019 primarily reflects the favorable comparison versus the prior year which included inventory step-upfrom lower intangible amortization related to the St. Jude Medical acquisition. The increase also reflects margin improvementexpense, and integration and restructuring costs in various businesses including Diabetes Care and Cardiovascular and Neuromodulation.2019.
Research and development expenses increased by $6$22 million, or 1.13.7 percent, in the third quarter of 2018,2019 and increased by $97$107 million, or 5.96.1 percent, in the first nine months of 2018, due primarily2019 compared to the additionprior year. The increase in the third quarter of 2019 reflects higher R&D spending in various businesses and the acquired Alere business, as well asacquisition of an R&D asset. The increase in R&D spending in the first nine months of 2019 primarily reflects higher spending on the acquisition of R&D assets. In the first quarter of 2019, in other areasconjunction with the acquisition of Cephea Valve Technologies, Inc., Abbott acquired an R&D asset valued at $102 million, which was immediately expensed. During the first nine months of 2018, Abbott acquired R&D assets valued at $43 million, which were immediately expensed. The increase in R&D expense during the first nine months of 2019 was also driven by higher R&D spending in various businesses, including Cardiovascular and Neuromodulation.Neuromodulation, partially offset by the favorable effect of foreign exchange. For the nine months ended September 30, 2018,2019, research and development expenditures totaled $781$811 million for the Cardiovascular and Neuromodulation Products segment, $436$419 million for the Diagnostic Products segment, $146$142 million for the Nutritional Products segment and $135$137 million for the Established Pharmaceutical Products segment.
Selling, general and administrative (SG&A) expenses forincreased 2.7 percent in the third quarter and decreased 0.4 percent in first nine months of 2018 increased 12.4 percent2019. The increase in the quarter is primarily due to higher selling and 10.1 percent, respectively, due primarily to the addition of the acquired Alere business, as well as higher spendingmarketing costs to drive continued growth and market expansion inacross various businesses, partially offset by the favorable effect of foreign exchange and lower acquisition-related expenses.
In the first quarter of 2018, Abbott retrospectively adopted Accounting Standards Update (ASU) 2017-07, Compensation — Retirement Benefits (Topic 715): Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost which changes the financial statement presentation requirements for pension and other postretirement benefit expense. While service cost continues to be reported in the same financial statement line items as other current employee compensation costs, the ASU requires all other components of pension and other postretirement benefit cost to be presented separately from service cost, and outside any subtotal of income from operations. As a result of the new accounting standard, approximately $120 million of pension and other post retirement related income is now being reported in Other (income) expense, netintegration costs. The decrease in the first nine months of 2018 and 2017.
Business Acquisitions
On January 4, 2017, Abbott completed the acquisition of St. Jude Medical, a global medical device manufacturer, for approximately $23.6 billion, including approximately $13.6 billion in cash and approximately $10 billion in Abbott common shares, which represented approximately 254 million shares of Abbott common stock, based on Abbott’s closing stock price on the acquisition date. As part of the acquisition, approximately $5.9 billion of St. Jude Medical’s debt was assumed, repaid or refinanced by Abbott. The acquisition provides expanded opportunities for future growth and2019 is an important part of the company’s ongoing effort to develop a strong, diverse portfolio of devices, diagnostics, nutritionals and branded generic pharmaceuticals. The combined business competes in nearly every area of the cardiovascular device market, as well as in the neuromodulation market.
Under the terms of the agreement, for each St. Jude Medical common share, St. Jude Medical shareholders received $46.75 in cash and 0.8708 of an Abbott common share. At an Abbott stock price of $39.36, which reflects the closing price on January 4, 2017, this represented a value of approximately $81 per St. Jude Medical common share and total purchase consideration of $23.6 billion. The cash portion of the acquisition was funded through a combination of medium and long-term debt issued in November 2016 and a $2.0 billion 120-day senior unsecured bridge term loan facility which was subsequently repaid.
In 2016, Abbott and St. Jude Medical agreed to sell certain businesses to Terumo Corporation (Terumo) for approximately $1.12 billion. The sale included the St. Jude Medical Angio-Seal and Femoseal vascular closure and Abbott’s Vado Steerable Sheath businesses. The sale closed on January 20, 2017 and no gain or loss was recorded in the Condensed Consolidated Statement of Earnings.
On October 3, 2017, Abbott acquired Alere, a diagnostic device and service provider, for $51.00 per common share in cash, which equated to a purchase price of approximately $4.5 billion. As part of the acquisition, Abbott tendered for Alere’s preferred shares for a total value of approximately $0.7 billion. In addition, approximately $3.0 billion of Alere’s debt was assumed and subsequently repaid. The acquisition establishes Abbott as a leader in point of care testing, expands Abbott’s global diagnostics presence and provides access to new products, channels and geographies. Abbott utilized a combination of cash on hand and debt to fund the acquisition.
The final allocation of the fair value of the Alere acquisition is shown in the table below:
(in billions) |
|
|
| |
Acquired intangible assets, non-deductible |
| $ | 3.5 |
|
Goodwill, non-deductible |
| 3.7 |
| |
Acquired net tangible assets |
| 1.0 |
| |
Deferred income taxes recorded at acquisition |
| (0.4 | ) | |
Net debt |
| (2.6 | ) | |
Preferred stock |
| (0.7 | ) | |
Total allocation of fair value |
| $ | 4.5 |
|
The goodwill isdue primarily attributable to expected synergies from combining operations, as well as intangible assets that do not qualify for separate recognition. The goodwill is identifiable to the Diagnostic Products reportable segment. The approximate valuefavorable effect of the acquired tangible assets is $430 million of trade accounts receivable, $425 million of inventory, $225 million of other current assets, $540 million of propertyforeign exchange and equipment,lower acquisition-related integration costs, partially offset by higher selling and $210 million of other long-term assets. The approximate value of the acquired tangible liabilities is $675 million of trade accounts payable and other current liabilities and $145 million of other non-current liabilities.marketing costs to drive continued growth across various businesses.
In the third quarter of 2017, Alere entered into agreements to sell its Triage MeterPro cardiovascular and toxicology business and the assets and liabilities related to its B-type Natriuretic Peptide assay business run on Beckman Coulter analyzers to Quidel Corporation (Quidel). The transactions with Quidel reflect a total purchase price of $400 million payable at the close of the transaction, $240 million payable in six annual installments beginning approximately nine months after the close of the transaction, and contingent consideration with a maximum value of $40 million. In the third quarter of 2017, Alere entered into an agreement with Siemens Diagnostics Holding II B.V. (Siemens) to sell its subsidiary, Epocal Inc., for approximately $200 million payable at the close of the transaction. Alere agreed to divest these businesses in connection with the review by the Federal Trade Commission and the European Commission of Abbott’s agreement to acquire Alere. The sale to Quidel closed on October 6, 2017, and the sale to Siemens closed on October 31, 2017. No gain or loss on these sales was recorded in the Condensed Consolidated Statement of Earnings.
On July 17, 2017, Abbott commenced a tender offer to purchase for cash the 1.77 million outstanding shares of Alere’s Series B Convertible Perpetual Preferred Stock at a price of $402 per share, plus accrued but unpaid dividends to, but not including, the settlement date of the tender offer. This tender offer was subject to the satisfaction of certain conditions, including Abbott’s acquisition of Alere and upon there being validly tendered (and not properly withdrawn) at the expiration date of the tender offer that number of shares of Preferred Stock that equaled at least a majority of the Preferred Stock issued and outstanding at the expiration of the tender offer. The tender offer expired on October 3, 2017. All conditions to the offer were satisfied and Abbott accepted for payment the 1.748 million shares of Preferred Stock that were validly tendered (and not properly withdrawn). The remaining shares were cashed out for an amount equal to the $400.00 per share liquidation preference of such shares, plus accrued but unpaid dividends, without interest. Payment for all of the shares of Preferred Stock was made in the fourth quarter of 2017.
Restructuring Plans
The results for the first nine months of 20182019 reflect charges under approved restructuring plans as part of the integration of the acquisitionacquisitions of St. Jude Medical and Alere or as well as costs related to other actions associated with the company’s plans to streamlinepart of various operations.cost reduction programs. Abbott recorded employee related severance and other charges of $63$101 million in the first nine months of 20182019 related to these initiatives, of which $12$28 million is recognized in Cost of products sold, $11$12 million is recognized in Research and development and $40$61 million is recognized in Selling, general and administrativeSG&A expense. See Note 107 to the financial statements, “Restructuring Plans,” for additional information regarding these charges.
23
Other (Income) Expense, net
Other (income) expense, net decreased by $51totaled $55 million of income in the third quarter of 2018, from $33 million of income in 20172019 compared to $18 million of expense in 2018 and decreased by $1.2 billion in the first nine months$140 million of 2018 compared to 2017. The increase in expense in the third quarter of 2018 as compared to 2017 was due to the impairment of an investment. The decrease in income in the first nine months of 20182019 compared to 2017$93 million of income in 2018. The change in Other (income) expense, net in the third quarter of 2019 as compared to 2018 was primarily due to the recording of an impairment of an investment in 2018. The increase in Other (income) expense, net in the first nine months of 2019 compared to 2018 was due to a pre-tax gain of $1.163 billion recorded in 2017 from Abbott’s completionhigher 2019 income related to the non-service cost component of the salenet periodic benefit associated with Abbott’s pension and post-retirement benefit plans and the 2018 investment impairment, partially offset by an unrealized gain on an investment in 2018 that resulted from an observable price change for a similar investment of AMO to Johnson & Johnson.the same issuer.
Interest Expense, net
Interest expense, net decreased $1$38 million in the third quarter of 20182019 and was unchanged$132 million in the first nine months of 2018 compared2019 due to 2017 as lowera reduction in interest expense due toresulting from the favorable impact of the euro debt refinancing in September 2018, as well as the repayment of debt was offset by lower interest income due to lower cash balances.in 2018 and the first quarter of 2019.
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 nine months of 2019, taxes on earnings from continuing operations include a $78 million reduction to the transition tax related to the Tax Cut and Jobs Act (TCJA) and approximately $95 million in excess tax benefits associated with share-based compensation. The $78 million reduction to the transition tax liability was the result of the issuance of final transition tax regulations by the U.S. Department of Treasury in the first quarter. This adjustment decreased the cumulative net tax expense related to the TCJA to $1.51 billion. In the first nine months of 2018, taxes on earnings from continuing operations include approximately $80 million in excess tax benefits associated with share-based compensation.compensation and a $53 million adjustment to the transition tax liability for associated effects related to state tax. Earnings from discontinued operations, net of tax, in the first nine months of 2018 reflect the recognition of $40 million of net tax benefits primarily as a result of the resolution of various tax positions related to prior years which decreased the gross amount of unrecognized tax benefits by $47 million. In the first nine months of 2017, taxes on earnings from continuing operations include $435 million of tax expense related to the gain on the sale of the AMO business, which is taxed at a discrete tax rate. Earnings from discontinued operations, net of tax, of $88 million for the first nine months of 2017 primarily reflects the recognition of net tax benefits as a result of the resolution of various tax positions related to prior years.
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 between $500$185 million and $700$430 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 20132016 are settled except for the federal income tax returns of the former Alere consolidated group which are settled through 2014.2014 and the former St. Jude Medical consolidated group which are settled through 2013.
Liquidity and Capital Resources September 30, 2019 Compared with December 31, 2018
The Tax Cuts$247 million increase in cash and Jobs Act (“TCJA”) was enacted incash equivalents from $3.8 billion at December 31, 2018 to $4.1 billion at September 30, 2019 primarily reflects the U.S. on December 22, 2017. The TCJA reduces the U.S. federal corporate tax rate from 35% to 21%, requires companies to pay a one-time transition tax on earnings of certain foreign subsidiaries that were previously tax deferred and creates new taxes on certain foreign sourced earnings.
In the fourth quarter of 2017, Abbott recorded an estimate of net tax expense of $1.46 billion for thefavorable impact of the TCJA, which was included in Taxes on Earnings from Continuing Operations in the Consolidated Statement of Earnings. The estimate was provisional and included a charge of approximately $2.89 billion for the transition tax,cash generated by operating activities, partially offset by a net benefitthe payment of dividends, capital expenditures and the repayment of approximately $1.42 billion for the remeasurement$500 million of deferred tax assets and liabilities and a net benefit of approximately $10 million related to certain other impacts of the TCJA.
In the first nine months of 2018, Abbott recorded a $53 million adjustment to the provisional transition tax liability for revisions to previously recorded federal estimates and associated effects related to state tax. This adjustment increases the estimate of net tax expense for the impact of TCJA to $1.513 billion.
Given the significant complexity of the TCJA, Abbott will continue to evaluate and analyze the impact of this legislation. The $1.513 billion estimate is provisional and is based on Abbott’s latest analysis of the TCJA and may be materially adjusted in future periods due to among other things, additional analysis performed by Abbott and additional guidance that may be issued by the U.S. Department of Treasury, the Securities and Exchange Commission, or the Financial Accounting Standards Board.
Discontinued Operations
On January 1, 2013, Abbott completed the separation of AbbVie Inc. (AbbVie), which was formed to hold Abbott’s research-based proprietary pharmaceuticals business. 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. Earnings from discontinued operations, net of tax, of $35 million and $88 milliondebt in the first nine months of 2018 and 2017, respectively, were driven primarily by the recognition of net tax benefits as a result of the resolution of various tax positions related to AbbVie’s operations for years prior to the separation.
Assets Held for Disposition
As discussed in Note 8 - Business Acquisitions, in conjunction with the acquisition of Alere, Abbott sold the Triage MeterPro cardiovascular and toxicology business and the assets and liabilities related to its B-type Natriuretic Peptide assay business run on Beckman Coulter analyzers to Quidel. The legal transfer of certain assets and liabilities related to these businesses did not occur2019. Working capital was $5.6 billion at the close of the sale to Quidel due to, among other factors, the time required to transfer marketing authorizations and other regulatory requirements in various countries. Under the terms of the sale agreement with Abbott, Quidel is subject to the risks and entitled to the benefits generated by these operations and assets. The assets presented as held for disposition in the Condensed Consolidated Balance Sheet as of September 30, 20182019 and December 31, 2017, primarily relate to the businesses sold to Quidel. The decrease2018. In 2019, increases in net assets held for disposition primarily represents the completion of the transfer of certain assetsinventory, accounts receivable and liabilities to Quidel.
(in millions) |
| September 30, |
| December 31, |
| ||
Trade receivables, net |
| $ | 9 |
| $ | 12 |
|
Total inventories |
| 3 |
| 8 |
| ||
Current assets held for disposition |
| 12 |
| 20 |
| ||
Net property and equipment |
| — |
| 56 |
| ||
Intangible assets, net of amortization |
| — |
| 18 |
| ||
Goodwill |
| 19 |
| 102 |
| ||
Non-current assets held for disposition |
| 19 |
| 176 |
| ||
Total assets held for disposition |
| $ | 31 |
| $ | 196 |
|
Liquidity and Capital Resources September 30, 2018 Compared with December 31, 2017
The reduction of cash and cash equivalents from $9.4 billion at December 31, 2017 to $7.4 billion at September 30, 2018 primarily reflects repayment of $8.3 billion of debt and the payment of dividends, partiallywere offset by cash generated from operations in the first nine months of 2018, as well as, approximately $4 billion of proceeds from the issuance of long-term euro debt on September 27, 2018. The net proceeds from the euro bond offering were subsequently used to redeem approximately $4 billion of long-term debt in October 2018. Working capital was $5.4 billion at September 30, 2018 and $11.2 billion at December 31, 2017. The $5.8 billion decrease in working capital in 2018 is primarily due to the reduction in cash and cash equivalents, as well as, an increase in the current portion of long-term debt related to the debt that was subsequently redeemedwill mature in October 2018.September 2020.
In the Condensed Consolidated Statement of Cash Flows, Net cash from operating activities for the first nine months of 20182019 totaled $4.5$3.7 billion, an increasea decrease of $605$815 million over the prior year due primarily to higher segment operating earnings, continued improvementsan increased investment in working capital, management,higher cash taxes paid and the timing of pension contributions in 2019 relative to 2017 and lower acquisition-related2018, partially offset by higher operating earnings. Other, net in Net cash from operating activities for the first nine months of 2019 was a use of $523 million and includes the impact of the payment of cash taxes of approximately $775 million and $337 million of pension contributions, partially offset by payment timing for various accrued expenses. Other, net in Net cash from operating activities for the first nine months of 2018 of $608 million includes the favorable impact of improvements in working capital management, as well as the effect of non-cash charges related to the impairment of certain assets and the accrual of certain debt extinguishment costs. The Other, net line in Net cash from operating activities for the first nine months of 2017 of $562 million2018 also includes the impact of approximately $435$71 million of tax expense associated with the dispositionpension contributions as a pension contribution of businesses. Other net,$270 million was made in the first nine months of 2017 also includes contributions to defined benefit pension plans of $335 million.December 2017. 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.
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In the first nine months of 2017, Abbott sold 51 million of the Mylan N.V. ordinary shares received upon the sale of its developed markets branded generics pharmaceuticals business to Mylan Inc. The sale of these shares generated cash proceeds of approximately $1.977 billion.
On January 5, 2018, Abbott paid off its $2.8 billion 5-year term loan and the remaining $1.150 billion balance under its revolving credit agreement.
On February 16, 2018,September 2019, the board of directors authorized the early redemption of up to $5 billion of outstanding long-term notes. RedemptionsThis bond redemption authorization supersedes the board’s previous authorization under this authorization include the following:which $700 million had not yet been redeemed.
· $0.947 billion principal amount of its 5.125% Notes due 2019 — redeemed on March 22, 2018
· $1.055 billion of the $2.850 billion principal amount of its 2.35% Notes due 2019 — redeemed on March 22, 2018
· $1.300 billion of the $1.795 billion outstanding principal amount of its 2.35% Notes due 2019 — redeemed on June 22, 2018
· $0.495 billion outstanding principal amount of its 2.35% Notes due 2019 — redeemed on September 28, 2018
$1.2 billion of the $5 billion authorization remains available. Abbott incurred a net charge of $14 million related to the March 22, 2018 early repayment of debt.
On September 17, 2018, Abbott repaid upon maturity the $500 million aggregate principal amount outstanding of the 2.00% Senior Notes due 2018.
On September 27, 2018, Abbott’s wholly owned subsidiary, Abbott Ireland Financing DAC, completed a euro debt offering of €3.420 billion of long-term debt consisting of €1.140 billion of non-interest bearing Senior Notes due 2020 at 99.727% of par value; €1.140 billion of 0.875% Senior Notes due 2023 at 99.912% of par value; and €1.140 billion of 1.5% Senior Notes due 2026 at 99.723% of par value. The proceeds equated to approximately $4 billion. The notes are guaranteed by Abbott.
On October 28, 2018, Abbott redeemed $750 million principal amount of its 2.00% Notes due 2020; $597 million principal amount of its 4.125% Notes due 2020; $900 million principal amount of its 3.25% Notes due 2023; $450 million principal amount of its 3.4% Notes due 2023; and $1.300 billion principal amount of its 3.75% Notes due 2026. These amounts are in addition to the $5 billion authorization discussed above. Abbott incurred a net charge of $67 million in the third quarter of 2018 related to the early repayment of this debt.
At September 30, 2018,2019, Abbott’s long-term debt rating was BBBBBB+ by Standard & Poor’s Corporation and Baa1A3 by Moody’s Investors Service. Abbott expects to maintain an investment grade rating. Abbott has readily available financial resources, including lines of credit of $5.0 billion which expire in 2019.2023.
In September 2014,October 2019, the board of directors authorized the repurchase of up to $3.0$3 billion of Abbott’s common shares from time to time. The 2014new authorization wasis in addition to the $512$795 million unused portion of athe previous share repurchase program announced in June 2013. In the first nine months of 2016, Abbott repurchased 10.4 million shares at a cost of $408 million under the programthat was authorized in September 2014.
On April 27, 2016, the board of directors authorized the issuance and sale for general corporate purposes of up to 75 million common shares that would result in proceeds of up to $3 billion.billion of common shares for general corporate purposes. No shares have been issued under this authorization.
In each of the first three quarters of 2018,2019, Abbott declared a quarterly dividend of $0.28$0.32 per share on its common shares, which represents an increase of approximately 6%14 percent over the $0.265$0.28 per share quarterly dividend declared in each of the first three quarters of 2017.2018.
Recently Issued Accounting Standards Not Yet Adopted
In February 2018,June 2016, the Financial Accounting Standards Board (FASB) issued ASU 2018-02,Accounting Standards Update (ASU) 2016-13, ReclassificationFinancial Instruments – Credit Losses which changes the methodology to be used to measure credit losses for certain financial instruments and financial assets, including trade receivables. The new methodology requires the recognition of Certain Tax Effects from Accumulated Other Comprehensive Income, which allows companiesan allowance that reflects the current estimate of credit losses expected to reclassify stranded tax effects resulting frombe incurred over the 2017 Tax Cuts and Jobs Act, from accumulated other comprehensive income to retained earnings.life of the financial asset. The new standard becomeswill be effective for Abbott at the beginning in the first quarter of 2019 and2020, with early adoption is permitted. Abbott is currently evaluatingassessing the impact theof this new guidance will havestandard on its consolidated financial statements.
In August 2017, the FASB issued ASU 2017-12, Targeted Improvements toLease Accounting for Hedging Activities, which makes changes to the designation and measurement guidance for qualifying hedging relationships and the presentation of hedge results. The standard becomes effective for Abbott beginning in the first quarter of 2019 and early adoption is permitted. Abbott is currently evaluating the effect that the new guidance will have on its consolidated financial statements.Standard
In February 2016, the FASB issued ASU 2016-02, Leases, which requires lessees to measure and recognize assetsa lease asset and liabilitiesliability on the balance sheet 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. Abbott will elect the transition method that allows the company to apply the standard at its adoption date rather than the beginning of the earliest comparative period presented in the financial statements. Abbott is currently evaluating the effect that the new guidance will have on its consolidated financial statements.
Revenue Recognition Standard
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 supersedes nearly all previously existing revenue recognition guidance. The core principle of the ASU is that an entity should recognize revenue when it transfers promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services.including operating leases. Abbott adopted the new standard as of January 1, 2018,2019 using the modified retrospective approach method. Under this method, entities recognizeand applied the cumulative effectstandard’s transition provisions as of applyingJanuary 1, 2019. As a result, no changes were made to the December 31, 2018 Consolidated Balance Sheet. Abbott elected to apply the package of practical expedients related to transition. These practical expedients allowed Abbott to carry forward its historical assessments of whether any existing contracts are or contain leases, the lease classification for each lease existing at January 1, 2019, and whether any initial direct costs for such leases qualified for capitalization.
The new lease accounting standard atdoes not have a material impact on the dateamounts reported in the Condensed Consolidated Statement of initial application with no restatementEarnings but does have a material impact on the amounts reported in the Condensed Consolidated Balance Sheet. Adoption of comparative periods presented. The cumulative effect of applying the new standard resulted in an increase to Earnings employed in the business in the Condensed Consolidated Balance Sheet recording of $23approximately $850 million which was recorded at January 1, 2018. The impact of adopting ASU 2014-09 was not significant to individual financial statement line itemsnew right of use (ROU) assets and additional liabilities for operating leases on the Condensed Consolidated Balance Sheet and Condensed Consolidated Statementas of Earnings.January 1, 2019.
See Note 2 to the financial statements, “New Accounting Standards,” for additional information regarding recently issued accounting standards.
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 20172018 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 20172018 Annual Report on Form 10-K.
25
PART I. FINANCIAL INFORMATION
Item 4.Controls and Procedures
PART II. OTHER INFORMATION 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, 2018,2019, 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.2017 and Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2018.
26
Item 2.Unregistered Sales of Equity Securities and Use of Proceeds
Period (a) Total (b) Average (c) Total Number (d) Maximum July 1, 2018 — July 31, 2018 0 (1) $ — — $ 925,131,209 (2) August 1, 2018 —August 31, 2018 12,328 (1) $ 63.369 — $ 925,131,209 (2) September 1, 2018 — September 30, 2018 26,017 (1) $ 67.884 — $ 925,131,209 (2) Total 38,345 (1) $ 66.432 — $ 925,131,209 (2) (d) Maximum Number (or (c) Total Number Approximate of Shares (or Dollar Value) of (a) Total Units) Purchased Shares (or Units) Number of (b) Average as Part of that May Yet Be Shares (or Price Paid per Publicly Purchased Under Units) Share (or Announced Plans the Plans or Period Purchased Unit) or Programs Programs July 1, 2019 - July 31, 2019 294 (1) $ 88.740 0 $ 795,235,049 (2) August 1, 2019 - August 31, 2019 28,134 (1) $ 85.134 0 $ 795,235,049 (2) September 1, 2019 - September 30, 2019 11,800 (1) $ 83.354 0 $ 795,235,049 (2) Total 40,228 (1) $ 84.638 0 $ 795,235,049 (2) 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. 27
Number of
Shares (or
Units)
Purchased
Price Paid per
Share (or
Unit)
of Shares (or
Units) Purchased
as Part of
Publicly
Announced Plans
or Programs
Number (or
Approximate
Dollar Value) of
Shares (or Units)
that May Yet Be
Purchased Under
the Plans or
Programs1. These shares include:1. These shares include: (i) the shares deemed surrendered to Abbott to pay the exercise price in connection with the exercise of employee stock options – 294 in July, 16,334 in August, and 0 in September; and (i) the shares deemed surrendered to Abbott to pay the exercise price in connection with the exercise of employee stock options — 0 in July, 0 in August, and 13,689 in September; 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 July, 11,800 in August, and 11,800 in September. (ii) the shares purchased on the open market for the benefit of participants in the Abbott Laboratories, Limited Employee Stock Purchase Plan — 0 in July, 12,328 in August, and 12,328 in September.2. On September 11, 2014, the board of directors authorized the repurchase of up to $3 billion of Abbott common shares, from time to time (the “2014 Plan”). On October 11, 2019, the board of directors authorized the repurchase of up to $3 billion of Abbott common shares, from time to time (the “2019 Plan”). The 2019 Plan is in addition to the unused portion of the 2014 Plan. 2. On September 11, 2014, Abbott announced that its board
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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 | | |
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32.2 | | |
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101 | | The following financial statements and notes from the Abbott Laboratories Quarterly Report on Form 10-Q for the quarter and nine months ended September 30, |
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104 | | Cover Page Interactive Data File (the cover page XBRL tags are embedded in the Inline XBRL document and included in Exhibit 101). |
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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.
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ABBOTT LABORATORIES | | |
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By: | /s/ Brian B. Yoor | |
| Brian B. Yoor | |
| Executive Vice President, Finance | |
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| Date: October 31, | |
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