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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
| |
☒ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended March 31, 2020
OR
| |
☐ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission File Number: 001-35565
AbbVie Inc.
|
| | |
(Exact name of registrant as specified in its charter) |
Delaware | | 32-0375147 |
(State or other jurisdiction of incorporation or organization) | | (I.R.S. employer identification number) |
1 North Waukegan Road
North Chicago, Illinois 60064-6400
Telephone: (847) 932-7900
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 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 ☒ No ☐
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 (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐
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 | ☐ |
| | 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. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
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 Stock, par value $0.01 per share | | ABBV | | New York Stock Exchange |
| | | | Chicago Stock Exchange |
1.375% Senior Notes due 2024 | | ABBV24 | | New York Stock Exchange |
0.750% Senior Notes due 2027 | | ABBV27 | | New York Stock Exchange |
2.125% Senior Notes due 2028 | | ABBV28 | | New York Stock Exchange |
1.250% Senior Notes due 2031 | | ABBV31 | | New York Stock Exchange |
As of April 30, 2020, AbbVie Inc. had 1,476,742,215 shares of common stock at $0.01 par value outstanding.
AbbVie Inc. and Subsidiaries
Table of Contents
|
| | |
| |
| | Page |
| | |
Item 1. | | |
Item 2. | | |
Item 3. | | |
Item 4. | | |
| | |
| |
| | |
Item 1. | | |
Item 1A. | | |
Item 2. | | |
Item 6. | | |
|
| |
2020 Form 10-Q |  | 1 |
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
AbbVie Inc. and Subsidiaries
Condensed Consolidated Statements of Earnings (unaudited)
|
| | | | | | | | |
| | Three months ended March 31, |
(in millions, except per share data) | | 2020 | | 2019 |
Net revenues | | $ | 8,619 |
| | $ | 7,828 |
|
| | | | |
Cost of products sold | | 1,942 |
| | 1,694 |
|
Selling, general and administrative | | 1,695 |
| | 1,680 |
|
Research and development | | 1,379 |
| | 1,289 |
|
Acquired in-process research and development | | — |
| | 155 |
|
Total operating costs and expenses | | 5,016 |
| | 4,818 |
|
Operating earnings | | 3,603 |
| | 3,010 |
|
| | | | |
Interest expense, net | | 428 |
| | 325 |
|
Net foreign exchange loss | | 5 |
| | 6 |
|
Other expense, net | | 72 |
| | 135 |
|
Earnings before income tax expense | | 3,098 |
| | 2,544 |
|
Income tax expense | | 88 |
| | 88 |
|
Net earnings | | $ | 3,010 |
| | $ | 2,456 |
|
| | | | |
Per share data | | | | |
Basic earnings per share | | $ | 2.02 |
| | $ | 1.65 |
|
Diluted earnings per share | | $ | 2.02 |
| | $ | 1.65 |
|
| | | | |
Weighted-average basic shares outstanding | | 1,481 |
| | 1,480 |
|
Weighted-average diluted shares outstanding | | 1,484 |
| | 1,483 |
|
The accompanying notes are an integral part of these condensed consolidated financial statements.
|
| |
2020 Form 10-Q |  | 2 |
AbbVie Inc. and Subsidiaries
Condensed Consolidated Statements of Comprehensive Income (unaudited)
|
| | | | | | | | |
| | Three months ended March 31, |
(in millions) | | 2020 | | 2019 |
Net earnings | | $ | 3,010 |
| | $ | 2,456 |
|
| | | | |
Foreign currency translation adjustments, net of tax expense (benefit) of $(8) for the three months ended March 31, 2020 and $1 for the three months ended March 31, 2019 | | (227 | ) | | (103 | ) |
Net investment hedging activities, net of tax expense (benefit) of $20 for the three months ended March 31, 2020 and $19 for the three months ended March 31, 2019 | | 72 |
| | 65 |
|
Pension and post-employment benefits, net of tax expense (benefit) of $15 for the three months ended March 31, 2020 and $6 for the three months ended March 31, 2019 | | 56 |
| | 25 |
|
Marketable security activities, net of tax expense (benefit) of $— for the three months ended March 31, 2020 and $— for the three months ended March 31, 2019 | | — |
| | 7 |
|
Cash flow hedging activities, net of tax expense (benefit) of $(2) for the three months ended March 31, 2020 and $(7) for the three months ended March 31, 2019 | | (2 | ) | | (30 | ) |
Other comprehensive loss | | (101 | ) | | (36 | ) |
Comprehensive income | | $ | 2,909 |
| | $ | 2,420 |
|
The accompanying notes are an integral part of these condensed consolidated financial statements.
|
| |
2020 Form 10-Q |  | 3 |
AbbVie Inc. and Subsidiaries
Condensed Consolidated Balance Sheets
|
| | | | | | | |
(in millions, except share data) | March 31, 2020 | | December 31, 2019 |
| (unaudited) | | |
Assets | | | |
Current assets | | | |
Cash and equivalents | $ | 41,142 |
| | $ | 39,924 |
|
Accounts receivable, net | 6,362 |
| | 5,428 |
|
Inventories | 1,844 |
| | 1,813 |
|
Prepaid expenses and other | 2,410 |
| | 2,354 |
|
Total current assets | 51,758 |
| | 49,519 |
|
| | | |
Investments | 78 |
| | 93 |
|
Property and equipment, net | 2,961 |
| | 2,962 |
|
Intangible assets, net | 18,203 |
| | 18,649 |
|
Goodwill | 15,561 |
| | 15,604 |
|
Other assets | 2,638 |
| | 2,288 |
|
Total assets | $ | 91,199 |
| | $ | 89,115 |
|
| | | |
Liabilities and Equity | | | |
Current liabilities | | | |
Short-term borrowings | $ | 6 |
| | $ | — |
|
Current portion of long-term debt and finance lease obligations | 3,756 |
| | 3,753 |
|
Accounts payable and accrued liabilities | 12,709 |
| | 11,832 |
|
Total current liabilities | 16,471 |
| | 15,585 |
|
| | | |
Long-term debt and finance lease obligations | 63,284 |
| | 62,975 |
|
Deferred income taxes | 959 |
| | 1,130 |
|
Other long-term liabilities | 17,900 |
| | 17,597 |
|
| | | |
Commitments and contingencies |
|
| |
|
|
| | | |
Stockholders’ equity (deficit) | | | |
Common stock, $0.01 par value, 4,000,000,000 shares authorized, 1,786,240,964 shares issued as of March 31, 2020 and 1,781,582,608 as of December 31, 2019 | 18 |
| | 18 |
|
Common stock held in treasury, at cost, 309,566,303 shares as of March 31, 2020 and 302,671,146 as of December 31, 2019 | (25,110 | ) | | (24,504 | ) |
Additional paid-in capital | 15,401 |
| | 15,193 |
|
Retained earnings | 5,973 |
| | 4,717 |
|
Accumulated other comprehensive loss | (3,697 | ) | | (3,596 | ) |
Total stockholders’ equity (deficit) | (7,415 | ) | | (8,172 | ) |
| | | |
Total liabilities and equity | $ | 91,199 |
| | $ | 89,115 |
|
The accompanying notes are an integral part of these condensed consolidated financial statements.
|
| |
2020 Form 10-Q |  | 4 |
AbbVie Inc. and Subsidiaries
Condensed Consolidated Statements of Equity (unaudited)
|
| | | | | | | | | | | | | | | | | | | | | | | | | | |
(in millions) | Common shares outstanding | | Common stock | | Treasury stock | | Additional paid-in capital | | Retained earnings | | Accumulated other comprehensive loss | | Total |
Balance at December 31, 2018 | 1,479 |
| | $ | 18 |
| | $ | (24,108 | ) | | $ | 14,756 |
| | $ | 3,368 |
| | $ | (2,480 | ) | | $ | (8,446 | ) |
Net earnings | — |
| | — |
| | — |
| | — |
| | 2,456 |
| | — |
| | 2,456 |
|
Other comprehensive loss, net of tax | — |
| | — |
| | — |
| | — |
| | — |
| | (36 | ) | | (36 | ) |
Dividends declared | — |
| | — |
| | — |
| | — |
| | (1,590 | ) | | — |
| | (1,590 | ) |
Purchases of treasury stock | (5 | ) | | — |
| | (419 | ) | | — |
| | — |
| | — |
| | (419 | ) |
Stock-based compensation plans and other | 4 |
| | — |
| | 25 |
| | 184 |
| | — |
| | — |
| | 209 |
|
Balance at March 31, 2019 | 1,478 |
| | $ | 18 |
| | $ | (24,502 | ) | | $ | 14,940 |
| | $ | 4,234 |
| | $ | (2,516 | ) | | $ | (7,826 | ) |
| | | | | | | | | | | | | |
Balance at December 31, 2019 | 1,479 |
| | $ | 18 |
| | $ | (24,504 | ) | | $ | 15,193 |
| | $ | 4,717 |
| | $ | (3,596 | ) | | $ | (8,172 | ) |
Net earnings | — |
| | — |
| | — |
| | — |
| | 3,010 |
| | — |
| | 3,010 |
|
Other comprehensive loss, net of tax | — |
| | — |
| | — |
| | — |
| | — |
| | (101 | ) | | (101 | ) |
Dividends declared | — |
| | — |
| | — |
| | — |
| | (1,754 | ) | | — |
| | (1,754 | ) |
Purchases of treasury stock | (7 | ) | | — |
| | (643 | ) | | — |
| | — |
| | — |
| | (643 | ) |
Stock-based compensation plans and other | 5 |
| | — |
| | 37 |
| | 208 |
| | — |
| | — |
| | 245 |
|
Balance at March 31, 2020 | 1,477 |
| | $ | 18 |
| | $ | (25,110 | ) | | $ | 15,401 |
| | $ | 5,973 |
| | $ | (3,697 | ) | | $ | (7,415 | ) |
The accompanying notes are an integral part of these condensed consolidated financial statements.
|
| |
2020 Form 10-Q |  | 5 |
AbbVie Inc. and Subsidiaries
Condensed Consolidated Statements of Cash Flows (unaudited)
|
| | | | | | | |
| Three months ended March 31, |
(in millions) (brackets denote cash outflows) | 2020 | | 2019 |
Cash flows from operating activities | | | |
Net earnings | $ | 3,010 |
| | $ | 2,456 |
|
Adjustments to reconcile net earnings to net cash from operating activities: | | | |
Depreciation | 115 |
| | 118 |
|
Amortization of intangible assets | 444 |
| | 385 |
|
Change in fair value of contingent consideration liabilities | 72 |
| | 169 |
|
Stock-based compensation | 219 |
| | 189 |
|
Upfront costs and milestones related to collaborations | 40 |
| | 195 |
|
Other, net | 1 |
| | (33 | ) |
Changes in operating assets and liabilities: | | | |
Accounts receivable | (1,025 | ) | | (316 | ) |
Inventories | (107 | ) | | (128 | ) |
Prepaid expenses and other assets | (19 | ) | | (112 | ) |
Accounts payable and other liabilities | 1,065 |
| | 94 |
|
Cash flows from operating activities | 3,815 |
| | 3,017 |
|
| | | |
Cash flows from investing activities | | | |
Acquisitions and investments | (12 | ) | | (320 | ) |
Acquisitions of property and equipment | (125 | ) | | (107 | ) |
Purchases of investment securities | (13 | ) | | (194 | ) |
Sales and maturities of investment securities | 26 |
| | 594 |
|
Other | (5 | ) | | — |
|
Cash flows from investing activities | (129 | ) | | (27 | ) |
| | | |
Cash flows from financing activities | | | |
Net change in commercial paper borrowings | — |
| | (200 | ) |
Repayments of other short-term borrowings | — |
| | (3,000 | ) |
Dividends paid | (1,763 | ) | | (1,588 | ) |
Purchases of treasury stock | (643 | ) | | (620 | ) |
Proceeds from the exercise of stock options | 12 |
| | 4 |
|
Payments of contingent consideration liabilities | (53 | ) | | — |
|
Other, net | 25 |
| | 21 |
|
Cash flows from financing activities | (2,422 | ) | | (5,383 | ) |
Effect of exchange rate changes on cash and equivalents | (46 | ) | | 1 |
|
Net change in cash and equivalents | 1,218 |
| | (2,392 | ) |
Cash and equivalents, beginning of period | 39,924 |
| | 7,289 |
|
| | | |
Cash and equivalents, end of period | $ | 41,142 |
| | $ | 4,897 |
|
The accompanying notes are an integral part of these condensed consolidated financial statements.
|
| |
2020 Form 10-Q |  | 6 |
AbbVie Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements (unaudited)
Note 1 Basis of Presentation
Basis of Historical Presentation
The unaudited interim condensed consolidated financial statements of AbbVie Inc. (AbbVie or the company) have been prepared pursuant to the rules and regulations of the U.S. Securities and Exchange Commission. Accordingly, certain information and footnote disclosures normally included in annual financial statements prepared in accordance with generally accepted accounting principles in the United States (U.S. GAAP) have been omitted. These unaudited interim condensed consolidated financial statements should be read in conjunction with the company’s audited consolidated financial statements and notes included in the company’s Annual Report on Form 10-K for the year ended December 31, 2019.
It is management’s opinion that these financial statements include all normal and recurring adjustments necessary for a fair presentation of the company’s financial position and operating results. Net revenues and net earnings for any interim period are not necessarily indicative of future or annual results. Certain reclassifications were made to conform the prior period interim condensed consolidated financial statements to the current period presentation.
Recent Accounting Pronouncements
Recently Adopted Accounting Pronouncements
ASU No. 2016-13
In June 2016, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2016-13, Financial Instruments - Credit Losses (Topic 326). The standard changes how credit losses are measured for most financial assets and certain other instruments. For trade and other receivables, held-to-maturity debt securities, loans and other financial instruments, the standard requires the use of a new forward-looking "expected credit loss" model that generally will result in the earlier recognition of allowances for losses. For available-for-sale debt securities with unrealized losses, the standard now requires allowances to be recorded instead of reducing the amortized cost of the investment. AbbVie adopted the standard in the first quarter of 2020. The adoption did not have a material impact on the company's consolidated financial statements.
Upon adoption of the standard, accounts receivable are stated at amortized cost less allowance for credit losses. The allowance for credit losses reflects the best estimate of future losses over the contractual life of outstanding accounts receivable and is determined on the basis of historical experience, specific allowances for known troubled accounts, other currently available information including customer financial condition, and both current and forecasted economic conditions. The allowance for credit losses was $46 million at March 31, 2020. There were no significant changes in credit loss risk factors that impacted the company's recorded allowance during the three months ended March 31, 2020.
Recent Accounting Pronouncements Not Yet Adopted
ASU No. 2019-12
In December 2019, the FASB issued ASU No. 2019-12, Income Taxes (Topic 740). The standard includes simplifications related to accounting for income taxes including removing certain exceptions related to the approach for intraperiod tax allocation and the recognition of deferred tax liabilities for outside basis differences. The standard also clarifies the accounting for transactions that result in a step-up in the tax basis of goodwill. The standard will be effective for AbbVie starting with the first quarter of 2021. AbbVie is currently assessing the impact of this guidance on its consolidated financial statements.
|
| |
2020 Form 10-Q |  | 7 |
Note 2 Supplemental Financial Information Interest Expense, Net |
| | | | | | | | |
| | Three months ended March 31, |
(in millions) | | 2020 | | 2019 |
Interest expense | | $ | 563 |
| | $ | 387 |
|
Interest income | | (135 | ) | | (62 | ) |
Interest expense, net | | $ | 428 |
| | $ | 325 |
|
Inventories |
| | | | | | | |
(in millions) | March 31, 2020 | | December 31, 2019 |
Finished goods | $ | 546 |
| | $ | 485 |
|
Work-in-process | 932 |
| | 942 |
|
Raw materials | 366 |
| | 386 |
|
Inventories | $ | 1,844 |
| | $ | 1,813 |
|
Property and Equipment |
| | | | | | | |
(in millions) | March 31, 2020 | | December 31, 2019 |
Property and equipment, gross | $ | 8,250 |
| | $ | 8,188 |
|
Accumulated depreciation | (5,289 | ) | | (5,226 | ) |
Property and equipment, net | $ | 2,961 |
| | $ | 2,962 |
|
Depreciation expense was $115 million for the three months ended March 31, 2020 and $118 million for the three months ended March 31, 2019.
|
| |
2020 Form 10-Q |  | 8 |
Note 3 Earnings Per Share
AbbVie grants certain restricted stock units (RSUs) that are considered to be participating securities. Due to the presence of participating securities, AbbVie calculates earnings per share (EPS) using the more dilutive of the treasury stock or the two-class method. For all periods presented, the two-class method was more dilutive.
The following table summarizes the impact of the two-class method:
|
| | | | | | | | |
| | Three months ended March 31, |
(in millions, except per share data) | | 2020 | | 2019 |
Basic EPS | | | | |
Net earnings | | $ | 3,010 |
| | $ | 2,456 |
|
Earnings allocated to participating securities | | 14 |
| | 12 |
|
Earnings available to common shareholders | | $ | 2,996 |
| | $ | 2,444 |
|
Weighted-average basic shares outstanding | | 1,481 |
| | 1,480 |
|
Basic earnings per share | | $ | 2.02 |
| | $ | 1.65 |
|
| | | | |
Diluted EPS | | | | |
Net earnings | | $ | 3,010 |
| | $ | 2,456 |
|
Earnings allocated to participating securities | | 14 |
| | 12 |
|
Earnings available to common shareholders | | $ | 2,996 |
| | $ | 2,444 |
|
Weighted-average shares of common stock outstanding | | 1,481 |
| | 1,480 |
|
Effect of dilutive securities | | 3 |
| | 3 |
|
Weighted-average diluted shares outstanding | | 1,484 |
| | 1,483 |
|
Diluted earnings per share | | $ | 2.02 |
| | $ | 1.65 |
|
Certain shares issuable under stock-based compensation plans were excluded from the computation of EPS because the effect would have been antidilutive. The number of common shares excluded was insignificant for all periods presented.
Note 4 Licensing, Acquisitions and Other Arrangements
Proposed Acquisition of Allergan plc
On June 25, 2019, AbbVie announced that it entered into a definitive transaction agreement under which AbbVie will acquire Allergan plc (Allergan) in a cash and stock transaction for a transaction equity value of approximately $63 billion, based on the closing price of AbbVie’s common stock of $78.45 on June 24, 2019. Under the terms of the transaction agreement, Allergan shareholders will receive 0.8660 AbbVie shares and $120.30 in cash for each Allergan share. On October 14, 2019, Allergan shareholders approved the proposed transaction.
Allergan is a global pharmaceutical leader focused on developing, manufacturing and commercializing branded pharmaceutical, device, biologic, surgical and regenerative medicine products for patients around the world. Allergan markets a portfolio of brands and products primarily focused on key therapeutic areas including aesthetics, eye care, neuroscience, gastroenterology and women's health.
The transaction is subject to customary closing conditions and regulatory approvals. In March 2020, AbbVie and Allergan signed a consent decree agreement with the staff of the U.S. Federal Trade Commission (FTC) regarding the proposed acquisition. Under the terms of the consent decree, the companies have agreed to divest brazikumab, Allergan's IL-23 inhibitor pipeline product, to AstraZeneca and Zenpep, a treatment for exocrine pancreatic insufficiency, to Nestle. Nestle will also acquire Viokace, another pancreatic enzyme preparation, as part of the same transaction. In March 2020, AbbVie and Allergan received final approval from the European Commission to close the pending transaction which was conditional upon the divestiture of brazikumab. In May 2020, AbbVie and Allergan received final approval from the FTC and the Irish High Court to close the transaction. The transaction is expected to close in May 2020.
|
| |
2020 Form 10-Q |  | 9 |
In anticipation of the proposed acquisition, AbbVie entered into several debt and financing arrangements. See Note 8 for additional information.
Other Licensing & Acquisitions Activity
Cash outflows related to other acquisitions and investments totaled $12 million for the three months ended March 31, 2020 and $320 million for the three months ended March 31, 2019. AbbVie recorded no acquired in-process research and development (IPR&D) charges for the three months ended March 31, 2020 and recorded acquired IPR&D charges of $155 million for the three months ended March 31, 2019.
Note 5 Collaboration with Janssen Biotech, Inc.
In December 2011, Pharmacyclics, a wholly-owned subsidiary of AbbVie, entered into a worldwide collaboration and license agreement with Janssen Biotech, Inc. and its affiliates (Janssen), one of the Janssen Pharmaceutical companies of Johnson & Johnson, for the joint development and commercialization of IMBRUVICA, a novel, orally active, selective covalent inhibitor of Bruton's tyrosine kinase (BTK) and certain compounds structurally related to IMBRUVICA, for oncology and other indications, excluding all immune and inflammatory mediated diseases or conditions and all psychiatric or psychological diseases or conditions, in the United States and outside the United States.
The collaboration provides Janssen with an exclusive license to commercialize IMBRUVICA outside of the United States and co-exclusively with AbbVie in the United States. Both parties are responsible for the development, manufacturing and marketing of any products generated as a result of the collaboration. The collaboration has no set duration or specific expiration date and provides for potential future development, regulatory and approval milestone payments of up to $200 million to AbbVie. The collaboration also includes a cost sharing arrangement for associated collaboration activities. Except in certain cases, Janssen is responsible for approximately 60% of collaboration development costs and AbbVie is responsible for the remaining 40% of collaboration development costs.
In the United States, both parties have co-exclusive rights to commercialize the products; however, AbbVie is the principal in the end-customer product sales. AbbVie and Janssen share pre-tax profits and losses equally from the commercialization of products. Sales of IMBRUVICA are included in AbbVie's net revenues. Janssen's share of profits is included in AbbVie's cost of products sold. Other costs incurred under the collaboration are reported in their respective expense line items, net of Janssen's share.
Outside the United States, Janssen is responsible for and has exclusive rights to commercialize IMBRUVICA. AbbVie and Janssen share pre-tax profits and losses equally from the commercialization of products. AbbVie's share of profits is included in AbbVie's net revenues. Other costs incurred under the collaboration are reported in their respective expense line items, net of Janssen's share.
The following table shows the profit and cost sharing relationship between Janssen and AbbVie:
|
| | | | | | | | |
| | Three months ended March 31, |
(in millions) | | 2020 | | 2019 |
United States - Janssen's share of profits (included in cost of products sold) | | $ | 450 |
| | $ | 386 |
|
International - AbbVie's share of profits (included in net revenues) | | 266 |
| | 193 |
|
Global - AbbVie's share of other costs (included in respective line items) | | 70 |
| | 72 |
|
AbbVie’s receivable from Janssen, included in accounts receivable, net, was $298 million at March 31, 2020 and $235 million at December 31, 2019. AbbVie’s payable to Janssen, included in accounts payable and accrued liabilities, was $445 million at March 31, 2020 and $455 million at December 31, 2019.
|
| |
2020 Form 10-Q |  | 10 |
Note 6 Goodwill and Intangible Assets
Goodwill
The following table summarizes the changes in the carrying amount of goodwill:
|
| | | |
(in millions) | |
Balance as of December 31, 2019 | $ | 15,604 |
|
Foreign currency translation adjustments | (43 | ) |
Balance as of March 31, 2020 | $ | 15,561 |
|
The company performs its annual goodwill impairment assessment in the third quarter, or earlier if impairment indicators exist. As of March 31, 2020, there were no accumulated goodwill impairment losses.
Intangible Assets, Net
The following table summarizes intangible assets:
|
| | | | | | | | | | | | | | | | | | | | | | | |
| March 31, 2020 | | December 31, 2019 |
(in millions) | Gross carrying amount | | Accumulated amortization | | Net carrying amount | | Gross carrying amount | | Accumulated amortization | | Net carrying amount |
Definite-lived intangible assets | | | | | | | | | | | |
Developed product rights | $ | 19,538 |
| | $ | (6,687 | ) | | $ | 12,851 |
| | $ | 19,547 |
| | $ | (6,405 | ) | | $ | 13,142 |
|
License agreements | 7,798 |
| | (2,446 | ) | | 5,352 |
| | 7,798 |
| | (2,291 | ) | | 5,507 |
|
Total intangible assets, net | $ | 27,336 |
| | $ | (9,133 | ) | | $ | 18,203 |
| | $ | 27,345 |
| | $ | (8,696 | ) | | $ | 18,649 |
|
Amortization expense was $444 million for the three months ended March 31, 2020 and $385 million for the three months ended March 31, 2019. Amortization expense was included in cost of products sold in the condensed consolidated statements of earnings. No intangible asset impairment charges were recorded for the three months ended March 31, 2020 and 2019.
Note 7 Restructuring Plans
AbbVie recorded restructuring charges of $17 million for the three months ended March 31, 2020 and $167 million for the three months ended March 31, 2019.
The following table summarizes the cash activity in the restructuring reserve for the three months ended March 31, 2020:
|
| | | |
(in millions) | |
Accrued balance as of December 31, 2019 | $ | 140 |
|
Restructuring charges | 17 |
|
Payments and other adjustments | (38 | ) |
Accrued balance as of March 31, 2020 | $ | 119 |
|
|
| |
2020 Form 10-Q |  | 11 |
Note 8 Financial Instruments and Fair Value Measures Risk Management Policy
See Note 11 to the company's Annual Report on Form 10-K for the year ended December 31, 2019 for a summary of AbbVie's risk management policy and use of derivative instruments.
Financial Instruments
Various AbbVie foreign subsidiaries enter into foreign currency forward exchange contracts to manage exposures to changes in foreign exchange rates for anticipated intercompany transactions denominated in a currency other than the functional currency of the local entity. These contracts, with notional amounts totaling $842 million at March 31, 2020 and $957 million at December 31, 2019, are designated as cash flow hedges and are recorded at fair value. The durations of these forward exchange contracts were generally less than 18 months. Accumulated gains and losses as of March 31, 2020 are reclassified from accumulated other comprehensive income (AOCI) and included in cost of products sold at the time the products are sold, generally not exceeding six months from the date of settlement.
In the third quarter of 2019, the company entered into treasury rate lock agreements with notional amounts totaling $10.0 billion to hedge exposure to variability in future cash flows resulting from changes in interest rates related to the issuance of long-term debt in connection with the proposed acquisition of Allergan. The treasury rate lock agreements were designated as cash flow hedges and recorded at fair value. The agreements were net settled upon issuance of the senior notes in November 2019 and the resulting net gain was recognized in other comprehensive income (loss). This gain is reclassified to interest expense, net over the term of the related debt.
In the fourth quarter of 2019, the company entered into interest rate swap contracts with notional amounts totaling $2.3 billion at March 31, 2020 and December 31, 2019. The effect of the hedge contracts is to change a floating-rate interest obligation to a fixed rate for that portion of the floating-rate debt. The contracts were designated as cash flow hedges and are recorded at fair value. Realized and unrealized gains or losses are included in AOCI and are reclassified to interest expense, net over the lives of the floating-rate debt.
The company also enters into foreign currency forward exchange contracts to manage its exposure to foreign currency denominated trade payables and receivables and intercompany loans. These contracts are not designated as hedges and are recorded at fair value. Resulting gains or losses are reflected in net foreign exchange gain or loss in the condensed consolidated statements of earnings and are generally offset by losses or gains on the foreign currency exposure being managed. These contracts had notional amounts totaling $8.2 billion at March 31, 2020 and $7.1 billion at December 31, 2019.
The company also uses foreign currency forward exchange contracts or foreign currency denominated debt to hedge its net investments in certain foreign subsidiaries and affiliates. The company had foreign currency forward exchange contracts with notional amounts totaling €971 million, £204 million and CHF62 million as well as €3.6 billion aggregate principal amount of senior Euro notes designated as net investment hedges at March 31, 2020 and December 31, 2019. The company uses the spot method of assessing hedge effectiveness for derivative instruments designated as net investment hedges. Realized and unrealized gains and losses from these hedges are included in AOCI and the initial fair value of hedge components excluded from the assessment of effectiveness is recognized in interest expense, net over the life of the hedging instrument.
AbbVie is a party to interest rate swap contracts designated as fair value hedges with notional amounts totaling $6.3 billion at March 31, 2020 and $10.8 billion at December 31, 2019. The effect of the hedge contracts is to change a fixed-rate interest obligation to a floating rate for that portion of the debt. AbbVie records the contracts at fair value and adjusts the carrying amount of the fixed-rate debt by an offsetting amount.
No amounts are excluded from the assessment of effectiveness for cash flow hedges or fair value hedges.
|
| |
2020 Form 10-Q |  | 12 |
The following table summarizes the amounts and location of AbbVie’s derivative instruments on the condensed consolidated balance sheets:
|
| | | | | | | | | | | | | | | |
| Fair value – Derivatives in asset position | | Fair value – Derivatives in liability position |
(in millions) | Balance sheet caption | March 31, 2020 | December 31, 2019 | | Balance sheet caption | March 31, 2020 | December 31, 2019 |
Foreign currency forward exchange contracts | | | | | | | |
Designated as cash flow hedges | Prepaid expenses and other | $ | 35 |
| $ | 3 |
| | Accounts payable and accrued liabilities | $ | — |
| $ | 14 |
|
Designated as cash flow hedges | Other assets | 2 |
| — |
| | Other long-term liabilities | — |
| — |
|
Designated as net investment hedges | Prepaid expenses and other | 22 |
| — |
| | Accounts payable and accrued liabilities | 1 |
| 24 |
|
Not designated as hedges | Prepaid expenses and other | 43 |
| 19 |
| | Accounts payable and accrued liabilities | 12 |
| 18 |
|
Interest rate swap contracts | | | | | | | |
Designated as cash flow hedges | Other assets | — |
| 3 |
| | Other long-term liabilities | 44 |
| — |
|
Designated as fair value hedges | Prepaid expenses and other | — |
| — |
| | Accounts payable and accrued liabilities | — |
| 2 |
|
Designated as fair value hedges | Other assets | 133 |
| 28 |
| | Other long-term liabilities | — |
| 74 |
|
Total derivatives | | $ | 235 |
| $ | 53 |
| | | $ | 57 |
| $ | 132 |
|
While certain derivatives are subject to netting arrangements with the company’s counterparties, the company does not offset derivative assets and liabilities within the condensed consolidated balance sheets.
The following table presents the pre-tax amounts of gains (losses) from derivative instruments recognized in other comprehensive income (loss):
|
| | | | | | | | |
| | Three months ended March 31, |
(in millions) | | 2020 | | 2019 |
Foreign currency forward exchange contracts | | | | |
Designated as cash flow hedges | | $ | 49 |
| | $ | 3 |
|
Designated as net investment hedges | | 40 |
| | — |
|
Interest rate swap contracts designated as cash flow hedges | | (46 | ) | | — |
|
Assuming market rates remain constant through contract maturities, the company expects to reclassify pre-tax gains of $34 million into cost of products sold for foreign currency cash flow hedges, pre-tax losses of $2 million into interest expense, net for interest rate swap cash flow hedges and pre-tax gains of $24 million into interest expense, net for treasury rate lock agreement cash flow hedges during the next 12 months.
Related to AbbVie’s non-derivative, foreign currency denominated debt designated as net investment hedges, the company recognized in other comprehensive income (loss) pre-tax gains of $60 million for the three months ended March 31, 2020 and $84 million for the three months ended March 31, 2019.
|
| |
2020 Form 10-Q |  | 13 |
The following table summarizes the pre-tax amounts and location of derivative instrument net gains (losses) recognized in the condensed consolidated statements of earnings, including the net gains (losses) reclassified out of AOCI into net earnings. See Note 10 for the amount of net gains (losses) reclassified out of AOCI.
|
| | | | | | | | | |
| | | Three months ended March 31, |
(in millions) | Statement of earnings caption | | 2020 | | 2019 |
Foreign currency forward exchange contracts | | | | | |
Designated as cash flow hedges | Cost of products sold | | $ | — |
| | $ | 40 |
|
Designated as net investment hedges | Interest expense, net | | 8 |
| | — |
|
Not designated as hedges | Net foreign exchange loss | | 2 |
| | 15 |
|
Treasury rate lock agreements designated as cash flow hedges | Interest expense, net | | 6 |
| | — |
|
Interest rate swap contracts | | | | | |
Designated as cash flow hedges | Interest expense, net | | 1 |
| | — |
|
Designated as fair value hedges | Interest expense, net | | 360 |
| | 112 |
|
Debt designated as hedged item in fair value hedges | Interest expense, net | | (360 | ) | | (112 | ) |
Fair Value Measures
The fair value hierarchy consists of the following three levels:
| |
• | Level 1 – Valuations based on unadjusted quoted prices in active markets for identical assets that the company has the ability to access; |
| |
• | Level 2 – Valuations based on quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active and model-based valuations in which all significant inputs are observable in the market; and |
| |
• | Level 3 – Valuations using significant inputs that are unobservable in the market and include the use of judgment by the company’s management about the assumptions market participants would use in pricing the asset or liability. |
The following table summarizes the bases used to measure certain assets and liabilities carried at fair value on a recurring basis on the condensed consolidated balance sheet as of March 31, 2020:
|
| | | | | | | | | | | | | | | |
| | | Basis of fair value measurement |
(in millions) | Total | | Quoted prices in active markets for identical assets (Level 1) | | Significant other observable inputs (Level 2) | | Significant unobservable inputs (Level 3) |
Assets | | | | | | | |
Cash and equivalents | $ | 41,142 |
| | $ | 1,272 |
| | $ | 39,870 |
| | $ | — |
|
Debt securities | 3 |
| | — |
| | 3 |
| | — |
|
Interest rate swap contracts | 133 |
| | — |
| | 133 |
| | — |
|
Foreign currency contracts | 102 |
| | — |
| | 102 |
| | — |
|
Total assets | $ | 41,380 |
| | $ | 1,272 |
| | $ | 40,108 |
| | $ | — |
|
Liabilities | | | | | | | |
Interest rate swap contracts | $ | 44 |
| | $ | — |
| | $ | 44 |
| | $ | — |
|
Foreign currency contracts | 13 |
| | — |
| | 13 |
| | — |
|
Contingent consideration | 7,359 |
| | — |
| | — |
| | 7,359 |
|
Total liabilities | $ | 7,416 |
| | $ | — |
| | $ | 57 |
| | $ | 7,359 |
|
|
| |
2020 Form 10-Q |  | 14 |
The following table summarizes the bases used to measure certain assets and liabilities carried at fair value on a recurring basis on the condensed consolidated balance sheet as of December 31, 2019:
|
| | | | | | | | | | | | | | | |
| | | Basis of fair value measurement |
(in millions) | Total | | Quoted prices in active markets for identical assets (Level 1) | | Significant other observable inputs (Level 2) | | Significant unobservable inputs (Level 3) |
Assets | | | | | | | |
Cash and equivalents | $ | 39,924 |
| | $ | 1,542 |
| | $ | 38,382 |
| | $ | — |
|
Debt securities | 3 |
| | — |
| | 3 |
| | — |
|
Equity securities | 24 |
| | 24 |
| | — |
| | — |
|
Interest rate swap contracts | 31 |
| | — |
| | 31 |
| | — |
|
Foreign currency contracts | 22 |
| | — |
| | 22 |
| | — |
|
Total assets | $ | 40,004 |
| | $ | 1,566 |
| | $ | 38,438 |
| | $ | — |
|
Liabilities | | | | | | | |
Interest rate swap contracts | $ |
|