10-Q 1 a15-17845_110q.htm 10-Q

Table of Contents

 

 

 

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, 2015

 

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

 

An Illinois Corporation

 

I.R.S. Employer Identification No.

 

 

36-0698440

 

100 Abbott Park Road

Abbott Park, Illinois 60064-6400

 

Telephone:  (224) 667-6100

 

Indicate by check mark whether the registrant: (l) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of l934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes x  No o

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 229.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes x  No o

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.  See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.  (Check one):

 

Large Accelerated Filer x

 

Accelerated Filer o

 

 

 

Non-Accelerated Filer o

 

Smaller reporting company o

(Do not check if a smaller reporting company)

 

 

 

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, 2015, Abbott Laboratories had 1,491,719,891 common shares without par value outstanding.

 

 

 



Table of Contents

 

Abbott Laboratories

 

Table of Contents

 

Part I - Financial Information

 

 

Page

 

 

Item 1. Financial Statements and Supplementary Data

 

 

 

Condensed Consolidated Statement of Earnings

3

Condensed Consolidated Statement of Comprehensive Income

4

Condensed Consolidated Balance Sheet

5

Condensed Consolidated Statement of Cash Flows

6

Notes to the Condensed Consolidated Financial Statements

7

 

 

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

19

 

 

Item 3. Quantitative and Qualitative Disclosures about Market Risk

26

 

 

Item 4. Controls and Procedures

26

 

 

Part II - Other Information

 

 

 

Item 1. Legal Proceedings

26

 

 

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

27

 

 

Item 6. Exhibits

27

 

 

Signature

28

 

2



Table of Contents

 

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

 

 

 

2015

 

2014

 

2015

 

2014

 

Net sales

 

$

5,150

 

$

5,079

 

$

15,217

 

$

14,891

 

 

 

 

 

 

 

 

 

 

 

Cost of products sold, excluding amortization of intangible assets

 

2,242

 

2,319

 

6,541

 

6,881

 

Amortization of intangible assets

 

151

 

132

 

458

 

392

 

Research and development

 

378

 

305

 

1,036

 

984

 

Selling, general and administrative

 

1,666

 

1,595

 

5,130

 

4,864

 

Total operating cost and expenses

 

4,437

 

4,351

 

13,165

 

13,121

 

 

 

 

 

 

 

 

 

 

 

Operating earnings

 

713

 

728

 

2,052

 

1,770

 

 

 

 

 

 

 

 

 

 

 

Interest expense

 

41

 

35

 

122

 

107

 

Interest (income)

 

(25

)

(18

)

(73

)

(53

)

Net foreign exchange (gain) loss

 

(14

)

(1

)

(63

)

 

Other (income) expense, net

 

(3

)

(3

)

(287

)

2

 

Earnings from continuing operations before taxes

 

714

 

715

 

2,353

 

1,714

 

Taxes on earnings from continuing operations

 

118

 

277

 

442

 

627

 

Earnings from continuing operations

 

596

 

438

 

1,911

 

1,087

 

 

 

 

 

 

 

 

 

 

 

Earnings (loss) from discontinued operations, net of taxes

 

(32

)

100

 

(7

)

293

 

Gain (loss) on sale of discontinued operations, net of tax

 

16

 

 

1,752

 

 

Net earnings (loss) from discontinued operations, net of tax

 

(16

)

100

 

1,745

 

293

 

Net Earnings

 

$

580

 

$

538

 

$

3,656

 

$

1,380

 

 

 

 

 

 

 

 

 

 

 

Basic Earnings (Loss) Per Common Share —

 

 

 

 

 

 

 

 

 

Continuing operations

 

$

0.40

 

$

0.29

 

$

1.27

 

$

0.71

 

Discontinued operations

 

(0.01

)

0.07

 

1.16

 

0.19

 

Net earnings

 

$

0.39

 

$

0.36

 

$

2.43

 

$

0.90

 

 

 

 

 

 

 

 

 

 

 

Diluted Earnings (Loss) Per Common Share —

 

 

 

 

 

 

 

 

 

Continuing operations

 

$

0.39

 

$

0.29

 

$

1.26

 

$

0.71

 

Discontinued operations

 

(0.01

)

0.07

 

1.15

 

0.19

 

Net earnings

 

$

0.38

 

$

0.36

 

$

2.41

 

$

0.90

 

 

 

 

 

 

 

 

 

 

 

Cash Dividends Declared Per Common Share

 

$

0.24

 

$

0.22

 

$

0.72

 

$

0.66

 

 

 

 

 

 

 

 

 

 

 

Average Number of Common Shares Outstanding Used for Basic Earnings Per Common Share

 

1,495,465

 

1,508,596

 

1,498,914

 

1,517,834

 

Dilutive Common Stock Options

 

9,702

 

11,184

 

10,230

 

10,798

 

 

 

 

 

 

 

 

 

 

 

Average Number of Common Shares Outstanding Plus Dilutive Common Stock Options

 

1,505,167

 

1,519,780

 

1,509,144

 

1,528,632

 

 

 

 

 

 

 

 

 

 

 

Outstanding Common Stock Options Having No Dilutive Effect

 

717

 

535

 

658

 

535

 

 

The accompanying notes to the condensed consolidated financial statements are an integral part of this statement.

 

3



Table of Contents

 

Abbott Laboratories and Subsidiaries

Condensed Consolidated Statement of Comprehensive Income

(Unaudited)

(dollars in millions)

 

 

 

Three Months Ended

 

Nine Months Ended

 

 

 

September 30

 

September 30

 

 

 

2015

 

2014

 

2015

 

2014

 

Net Earnings

 

$

580

 

$

538

 

$

3,656

 

$

1,380

 

Foreign currency translation (loss) gain adjustments

 

(645

)

(1,096

)

(1,472

)

(1,053

)

Net actuarial gains (losses) and amortization of net actuarial (losses) and prior service (cost) and credits, net of taxes of $14 and $39 in 2015 and $7 and $22 in 2014

 

26

 

16

 

79

 

44

 

Unrealized gains (losses) on marketable equity securities, net of tax expense (benefit) of $(240) and $104 in 2015 and $(5) and $(7) in 2014

 

(1,596

)

(8

)

(901

)

(12

)

Net adjustments for derivative instruments designated as cash flow hedges and other, net of taxes of $2 and $2 in 2015 and $14 and $12 in 2014

 

8

 

65

 

9

 

58

 

Other comprehensive income (loss)

 

(2,207

)

(1,023

)

(2,285

)

(963

)

Comprehensive Income (Loss)

 

$

(1,627

)

$

(485

)

$

1,371

 

$

417

 

 

 

 

 

 

 

 

Sept. 30,
2015

 

Dec. 31,
2014

 

Supplemental Accumulated Other Comprehensive Income (Loss) Information, net of tax:

 

 

 

 

 

 

 

 

 

Cumulative foreign currency translation (loss) adjustments

 

 

 

 

 

$

(4,288

)

$

(2,924

)

Net actuarial (losses) and prior service cost and credits

 

 

 

 

 

(2,131

)

(2,229

)

Cumulative unrealized gains (losses) on marketable equity securities

 

 

 

 

 

(900

)

1

 

Cumulative gains (losses) on derivative instruments designated as cash flow hedges and other

 

 

 

 

 

108

 

99

 

 

The accompanying notes to the condensed consolidated financial statements are an integral part of this statement.

 

4



Table of Contents

 

Abbott Laboratories and Subsidiaries

Condensed Consolidated Balance Sheet

(Unaudited)

(dollars in millions)

 

 

 

September 30,
2015

 

December 31,
2014

 

Assets

 

 

 

 

 

Current Assets:

 

 

 

 

 

Cash and cash equivalents

 

$

3,132

 

$

4,063

 

Short-term investments

 

3,007

 

397

 

Trade receivables, less allowances of $358 in 2015 and $310 in 2014

 

3,460

 

3,586

 

Inventories:

 

 

 

 

 

Finished products

 

1,810

 

1,807

 

Work in process

 

289

 

278

 

Materials

 

534

 

558

 

Total inventories

 

2,633

 

2,643

 

Prepaid expenses, deferred income taxes, and other receivables

 

3,523

 

3,680

 

Current assets held for disposition

 

139

 

892

 

Total Current Assets

 

15,894

 

15,261

 

Investments

 

3,055

 

229

 

Property and equipment, at cost

 

12,528

 

12,632

 

Less: accumulated depreciation and amortization

 

6,731

 

6,697

 

Net property and equipment

 

5,797

 

5,935

 

Intangible assets, net of amortization

 

5,844

 

6,198

 

Goodwill

 

9,750

 

10,067

 

Deferred income taxes and other assets

 

1,383

 

1,651

 

Non-current assets held for disposition

 

2

 

1,934

 

 

 

$

41,725

 

$

41,275

 

Liabilities and Shareholders’ Investment

 

 

 

 

 

Current Liabilities:

 

 

 

 

 

Short-term borrowings

 

$

2,370

 

$

4,382

 

Trade accounts payable

 

1,007

 

1,064

 

Salaries, wages and commissions

 

854

 

776

 

Other accrued liabilities

 

3,294

 

2,943

 

Dividends payable

 

359

 

362

 

Income taxes payable

 

483

 

270

 

Current portion of long-term debt

 

32

 

55

 

Current liabilities held for disposition

 

356

 

680

 

Total Current Liabilities

 

8,755

 

10,532

 

Long-term debt

 

5,953

 

3,408

 

Post-employment obligations, deferred income taxes and other long-term liabilities

 

5,798

 

5,588

 

Non-current liabilities held for disposition

 

 

108

 

Commitments and Contingencies

 

 

 

 

 

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 Issued at stated capital amount - Shares: 2015: 1,700,525,346; 2014: 1,694,929,949

 

12,641

 

12,383

 

Common shares held in treasury, at cost — Shares: 2015: 208,805,455; 2014: 186,894,515

 

(9,694

)

(8,678

)

Earnings employed in the business

 

25,375

 

22,874

 

Accumulated other comprehensive income (loss)

 

(7,211

)

(5,053

)

Total Abbott Shareholders’ Investment

 

21,111

 

21,526

 

Noncontrolling Interests in Subsidiaries

 

108

 

113

 

Total Shareholders’ Investment

 

21,219

 

21,639

 

 

 

$

41,725

 

$

41,275

 

 

The accompanying notes to the condensed consolidated financial statements are an integral part of this statement.

 

5



Table of Contents

 

Abbott Laboratories and Subsidiaries

Condensed Consolidated Statement of Cash Flows

(Unaudited)

(dollars in millions)

 

 

 

Nine Months Ended September 30

 

 

 

2015

 

2014

 

Cash Flow From (Used in) Operating Activities:

 

 

 

 

 

Net earnings

 

$

3,656

 

$

1,380

 

Adjustments to reconcile net earnings to net cash from operating activities -

 

 

 

 

 

Depreciation

 

648

 

689

 

Amortization of intangibles

 

458

 

464

 

Share-based compensation

 

249

 

208

 

Gain on sale of discontinued operations

 

(2,837

)

 

Gain on sale of Mylan N.V. shares

 

(207

)

 

Trade receivables

 

(151

)

(173

)

Inventories

 

(213

)

(203

)

Other, net

 

535

 

72

 

Net Cash From Operating Activities

 

2,138

 

2,437

 

 

 

 

 

 

 

Cash Flow From (Used in) Investing Activities:

 

 

 

 

 

Acquisitions of property and equipment

 

(862

)

(790

)

Proceeds from business disposition

 

230

 

 

Acquisitions of businesses and technologies, net of cash acquired

 

(235

)

(2,822

)

Proceeds from the sale of Mylan N.V. shares

 

2,290

 

 

(Purchases) Sales of other investment securities, net

 

(2,626

)

3,358

 

Other

 

43

 

62

 

Net Cash (Used In) Investing Activities

 

(1,160

)

(192

)

 

 

 

 

 

 

Cash Flow From (Used in) Financing Activities:

 

 

 

 

 

Net (repayments of ) proceeds from issuance of short-term debt and other

 

(2,019

)

1,269

 

Proceeds from the issuance of long-term debt

 

2,485

 

 

Repayments of long-term debt

 

(36

)

 

Contingent and other consideration payments related to business acquisitions

 

 

(400

)

Purchases of common shares

 

(1,349

)

(2,194

)

Proceeds from stock options exercised, including income tax benefit

 

263

 

290

 

Dividends paid

 

(1,083

)

(1,007

)

Net Cash (Used in) Financing Activities

 

(1,739

)

(2,042

)

 

 

 

 

 

 

Effect of exchange rate changes on cash and cash equivalents

 

(170

)

(65

)

 

 

 

 

 

 

Net Increase (Decrease) in Cash and Cash Equivalents

 

(931

)

138

 

Cash and Cash Equivalents, Beginning of Year

 

4,063

 

3,475

 

Cash and Cash Equivalents, End of Period

 

$

3,132

 

$

3,613

 

 

The accompanying notes to the condensed consolidated financial statements are an integral part of this statement.

 

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Table of Contents

 

Abbott Laboratories and Subsidiaries

 

Notes to the Condensed Consolidated Financial Statements

 

September 30, 2015

 

(Unaudited)

 

Note 1 — Basis of Presentation

 

The accompanying unaudited, condensed consolidated financial statements have been prepared pursuant to rules and regulations of the Securities and Exchange Commission and, therefore, do not include all information and footnote disclosures normally included in audited financial statements.  However, in the opinion of management, all adjustments (which include only normal adjustments) necessary to present fairly the results of operations, financial position and cash flows have been made.  It is suggested that these statements be read in conjunction with the financial statements included in Abbott’s Annual Report on Form 10-K for the year ended December 31, 2014.  The consolidated financial statements include the accounts of the parent company and subsidiaries, after elimination of intercompany transactions.

 

Note 2 — Discontinued Operations

 

On February 27, 2015, Abbott completed the sale of its developed markets branded generics pharmaceuticals business to Mylan Inc. (Mylan) for 110 million shares (or approximately 22%) of a newly formed entity (Mylan N.V.) that combined Mylan’s existing business and Abbott’s developed markets branded generics pharmaceuticals business.  Mylan N.V. is publicly traded.  Historically, this business was included in Abbott’s Established Pharmaceutical Products segment.  Abbott retained its branded generics pharmaceuticals business in emerging markets.  At the date of closing, the 110 million Mylan N.V. shares that Abbott received were valued at $5.77 billion and Abbott recorded an after-tax gain on the sale of the business of approximately $1.6 billion.  The shareholder agreement with Mylan N.V. includes voting and other restrictions that prevent Abbott from exercising significant influence over the operating and financial policies of Mylan N.V.

 

At the close of this transaction, Abbott and Mylan entered into transition services agreements pursuant to which Abbott and Mylan are providing various back office support services to each other on an interim transitional basis.  Transition services may be provided for up to 2 years.  Charges by Abbott under these transition services agreements are recorded as a reduction of the costs to provide the respective service in the applicable expense category in the Condensed Consolidated Statement of Earnings.  This transition support does not constitute significant continuing involvement in Mylan’s operations. Abbott also entered into manufacturing supply agreements with Mylan related to certain products, with the supply term ranging from 3 to 10 years and requiring a 2 year notice prior to termination.  The cash flows associated with these transition service and manufacturing supply agreements are not expected to be significant and therefore, these cash flows are not direct cash flows of the disposed component under Accounting Standards Codification 205.

 

In April 2015, Abbott sold 40.3 million of the 110 million ordinary shares of Mylan N.V. received in the sale of the developed markets branded generics pharmaceuticals business to Mylan.  In the first nine months of 2015, Abbott recorded a pretax gain of $207 million on $2.29 billion in net proceeds from the sale of these shares. The gain is recognized in the Other (income) expense line of the Condensed Consolidated Statement of Earnings. The proceeds from the sale were invested in short-term investments.

 

On February 10, 2015, Abbott completed the sale of its animal health business to Zoetis Inc.   Abbott received cash proceeds of $230 million and reported an after tax gain on the sale of approximately $130 million.

 

As a result of the disposition of the above businesses, the current and prior year operating results of these businesses up to the date of sale are reported as part of discontinued operations on the Earnings from Discontinued Operations, net of tax line in the Condensed Consolidated Statement of Earnings.  Discontinued operations include an allocation of interest expense assuming a uniform ratio of consolidated debt to equity for all of Abbott’s historical 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. For a small portion of AbbVie’s operations, the legal transfer of AbbVie’s assets (net of liabilities) did not occur with the separation of AbbVie on January 1, 2013 due to the time required to transfer marketing authorizations and other regulatory requirements in each of these countries.  Under the terms of the separation agreement with Abbott, AbbVie is subject to the risks and entitled to the benefits generated by these operations and assets.  The majority of these operations were transferred to AbbVie in 2013 and 2014.  These assets and liabilities have been presented as held for disposition in the Condensed Consolidated Balance Sheet. Abbott has recorded a prepaid asset of $216 million for its obligation to transfer these net liabilities held for disposition to AbbVie.

 

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Table of Contents

 

Abbott has retained all liabilities for all U.S. federal and foreign income taxes on income prior to the separation, as well as certain non-income taxes attributable to AbbVie’s business prior to the separation. AbbVie generally will be liable for all other taxes attributable to its business. Earnings from discontinued operations in the first nine months of 2015 and 2014 reflect the recognition of $10 million of tax expense and $37 million of tax benefit, respectively, primarily as a result of the resolution of various tax positions related to AbbVie’s operations for years prior to the separation. The following table summarizes the components of discontinued operations:

 

 

 

Three Months
Ended Sept. 30

 

Nine Months
Ended Sept. 30

 

(in millions)

 

2015

 

2014

 

2015

 

2014

 

Net Sales

 

 

 

 

 

 

 

 

 

Developed markets generics pharmaceuticals and animal health businesses

 

$

 

$

544

 

$

256

 

$

1,527

 

AbbVie

 

 

 

 

 

Total

 

$

 

$

544

 

$

256

 

$

1,527

 

Earnings (Loss) Before Tax

 

 

 

 

 

 

 

 

 

Developed markets generics pharmaceuticals and animal health businesses

 

$

(6

)

$

163

 

$

14

 

$

324

 

AbbVie

 

 

 

 

 

Total

 

$

(6

)

$

163

 

$

14

 

$

324

 

Income Tax Expense (Benefit)

 

 

 

 

 

 

 

 

 

Developed markets generics pharmaceuticals and animal health businesses

 

$

(1

)

$

58

 

$

11

 

$

68

 

AbbVie

 

27

 

5

 

10

 

(37

)

Total

 

$

26

 

$

63

 

$

21

 

$

31

 

Net Earnings (Loss)

 

 

 

 

 

 

 

 

 

Developed markets generics pharmaceuticals and animal health businesses

 

$

(5

)

$

105

 

$

3

 

$

256

 

AbbVie

 

(27

)

(5

)

(10

)

37

 

Total

 

$

(32

)

$

100

 

$

(7

)

$

293

 

 

The sale of the developed markets branded generics pharmaceuticals and animal health businesses in the first nine months of 2015 resulted in the recognition of a pretax gain of $2.837 billion, tax expense of $1.085 billion and an after tax gain of $1.752 billion.

 

The assets of the operations held for disposition and the liabilities to be assumed in the disposition related to the businesses noted above, as well as the AbbVie assets and liabilities are classified as held for disposition in the Condensed Consolidated Balance Sheet as of September 30, 2015 and December 31, 2014.  The cash flows associated with the developed markets branded generics pharmaceuticals and animal health businesses are included in Abbott’s Condensed Consolidated Statement of Cash Flows up to the date of disposition.

 

The following is a summary of the assets and liabilities held for disposition:

 

(in millions)

 

September 30,
2015

 

December 31,
2014

 

Trade receivables, net

 

$

58

 

$

498

 

Total inventories

 

48

 

254

 

Prepaid expenses, deferred income taxes, and other receivables

 

33

 

140

 

Current assets held for disposition

 

139

 

892

 

Net property and equipment

 

2

 

125

 

Intangible assets, net of amortization

 

 

804

 

Goodwill

 

 

950

 

Deferred income taxes and other assets

 

 

55

 

Non-current assets held for disposition

 

2

 

1,934

 

Total assets held for disposition

 

$

141

 

$

2,826

 

 

 

 

 

 

 

Trade accounts payable

 

$

337

 

$

423

 

Salaries, wages, commissions and other accrued liabilities

 

19

 

257

 

Current liabilities held for disposition

 

356

 

680

 

Post-employment obligations, deferred income taxes and other long-term liabilities

 

 

108

 

Total liabilities held for disposition

 

$

356

 

$

788

 

 

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Table of Contents

 

Note 3 — Supplemental Financial Information

 

Shares of unvested restricted stock that contain non-forfeitable rights to dividends are treated as participating securities and are included in the computation of earnings per share under the two-class method.  Under the two-class method, net earnings are allocated between common shares and participating securities. Earnings from Continuing Operations allocated to common shares for the three months ended September 30, 2015 and 2014 were $593 million and $437 million, respectively and for the nine months ended September 30, 2015 and 2014 were $1.902 billion and $1.083 billion, respectively.  Net earnings allocated to common shares for the three months ended September 30, 2015 and 2014 were $577 million and $536 million, respectively, and for the nine months ended September 30, 2015 and 2014 were $3.638 billion and $1.373 billion, respectively.

 

Other (income) expense, net in the first nine months of 2015 primarily relates to a $207 million gain on the sale of a portion of Abbott’s position in Mylan N.V. stock and $79 million of income resulting from a decrease in the fair value of contingent consideration related to a business acquisition.  In the first nine months of 2015, Abbott sold 40.3 million of the 110 million ordinary shares of Mylan N.V. received in the sale of the developed markets branded generics pharmaceuticals business to Mylan.  Abbott received $2.29 billion in net proceeds from the sale of these shares.  As a result of this sale, Abbott’s ownership interest in Mylan N.V. decreased from approximately 22% to approximately 14%.

 

Other, net in Net cash from operating activities in the Condensed Consolidated Statement of Cash Flows for the first nine months of 2015 and 2014 includes the effects of contributions to defined benefit plans of $551 million and $350 million, respectively, and to the post-employment medical and dental benefit plans of $24 million and $40 million in the nine month periods of 2015 and 2014, respectively. The first nine months of 2015 also includes the non-cash impact of approximately $1.1 billion of tax expense associated with the gain on the sale of businesses. The first nine months of 2014 includes approximately $165 million of cash refunded by taxing authorities, resulting from the resolution of various tax positions pertaining to prior years; and the timing of cash taxes.

 

The components of short-term and long-term investments as of September 30, 2015 and December 31, 2014 are as follows:

 

Short-term Investments

 

September 30,

 

December 31,

 

(in millions)

 

2015

 

2014

 

Investments, primarily bank time deposits

 

$

3,007

 

$

397

 

 

Long-term Investments

 

 

 

 

 

(in millions)

 

 

 

 

 

Equity securities

 

$

3,038

 

$

212

 

Other

 

17

 

17

 

Total

 

$

3,055

 

$

229

 

 

The long-term investments in equity securities as of September 30, 2015 include 69.7 million of ordinary shares of Mylan N.V. with a market value of $2.808 billion.

 

In March 2015, Abbott issued $2.5 billion of long-term debt consisting of $750 million of 2.00% Senior Notes due March 15, 2020; $750 million of 2.55% Senior Notes due March 15, 2022; and $1.0 billion of 2.95% Senior Notes due March 15, 2025.  Abbott also entered into interest rate swap contracts totaling $2.5 billion.  These contracts have the effect of changing Abbott’s obligation from a fixed interest rate to a variable interest rate obligation.

 

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Note 4 — 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
Currency Translation
Adjustments

 

Net Actuarial
Losses and Prior
Service Costs and
Credits

 

Cumulative
Unrealized Gains
(Losses) on
Marketable Equity
Securities

 

Cumulative Gains
on Derivative
Instruments
Designated as Cash
Flow Hedges

 

(in millions)

 

2015

 

2014

 

2015

 

2014

 

2015

 

2014

 

2015

 

2014

 

Balance at June 30

 

$

(3,643

)

$

(675

)

$

(2,157

)

$

(1,284

)

$

696

 

$

9

 

$

100

 

$

(2

)

Other comprehensive income (loss) before reclassifications

 

(645

)

(1,096

)

 

 

(1,596

)

2

 

41

 

67

 

Amounts reclassified from accumulated other comprehensive income

 

 

 

26

 

16

 

 

(10

)

(33

)

(2

)

Net current period comprehensive income

 

(645

)

(1,096

)

26

 

16

 

(1,596

)

(8

)

8

 

65

 

Balance at September 30

 

$

(4,288

)

$

(1,771

)

$

(2,131

)

$

(1,268

)

$

(900

)

$

1

 

$

108

 

$

63

 

 

 

 

Nine Months Ended September 30

 

 

 

Cumulative Foreign
Currency Translation
Adjustments

 

Net Actuarial
Losses and Prior
Service Costs and
Credits

 

Cumulative
Unrealized Gains
(Losses) on
Marketable Equity
Securities

 

Cumulative Gains
on Derivative
Instruments
Designated as Cash
Flow Hedges

 

(in millions)

 

2015

 

2014

 

2015

 

2014

 

2015

 

2014

 

2015

 

2014

 

Balance at December 31, 2014 and 2013

 

$

(2,924

)

$

(718

)

$

(2,229

)

$

(1,312

)

$

1

 

$

13

 

$

99

 

$

5

 

Impact of business dispositions

 

108

 

 

19

 

 

 

 

 

 

Other comprehensive income (loss) before reclassifications

 

(1,472

)

(1,053

)

 

 

(763

)

4

 

89

 

66

 

Amounts reclassified from accumulated other comprehensive income

 

 

 

79

 

44

 

(138

)

(16

)

(80

)

(8

)

Net current period comprehensive income

 

(1,472

)

(1,053

)

79

 

44

 

(901

)

(12

)

9

 

58

 

Balance at September 30

 

$

(4,288

)

$

(1,771

)

$

(2,131

)

$

(1,268

)

$

(900

)

$

1

 

$

108

 

$

63

 

 

Reclassified amounts for foreign currency translation are recorded in the Condensed Consolidated Statement of Earnings as Net foreign exchange loss (gain); gains on marketable equity securities as Other (income) expense, net and cash flow hedges as Cost of products sold.  Net actuarial losses and prior service cost are included as a component of net periodic benefit plan costs; see Note 11 for additional details.

 

Note 5 — Business Acquisitions

 

In September 2014, Abbott completed the acquisition of the controlling interest in CFR Pharmaceuticals S.A. (CFR) for approximately $2.9 billion in cash ($2.8 billion net of CFR cash on hand at closing). Including the assumption of approximately $570 million of debt, the total cost of the acquisition was $3.4 billion.  The acquisition of CFR more than doubles Abbott’s branded generics pharmaceutical presence in Latin America and further expands its presence in emerging markets.  CFR’s financial results are included in Abbott’s financial statements beginning on September 26, 2014, the date that Abbott acquired control of this business. Abbott currently owns 99.9% of the outstanding ordinary shares of CFR.  The fair value of the non-controlling interest at the acquisition date was approximately $3 million.  The acquisition was funded with cash and cash equivalents and short-term investments.  The final allocation of the fair value of the acquisition is shown in the table below.

 

(in billions)

 

 

 

Acquired intangible assets, non-deductible

 

$

1.87

 

Goodwill, non-deductible

 

1.42

 

Acquired net tangible assets

 

0.03

 

Deferred income taxes recorded at acquisition

 

(0.40

)

Total final allocation of fair value

 

$

2.92

 

 

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Acquired intangible assets consist primarily of product rights for currently marketed products and are amortized over 12 to 16 years (weighted average of 15 years).  The goodwill is primarily attributable to intangible assets that do not qualify for separate recognition.  The goodwill is identifiable to the Established Pharmaceutical Products segment.  The acquired tangible assets consist primarily of cash and cash equivalents of approximately $94 million, trade accounts receivable of approximately $180 million, inventory of approximately $169 million, other current assets of approximately $51 million, property and equipment of approximately $210 million, and other long-term assets of approximately $145 million.  Assumed liabilities consist of borrowings of approximately $570 million, trade accounts payable and other current liabilities of approximately $240 million and other noncurrent liabilities of approximately $14 million.

 

Annualized net sales for CFR Pharmaceuticals are expected to total approximately $750 million at current exchange rates. Had the acquisition of CFR Pharmaceuticals taken place on January 1, 2013, the consolidated net sales and earnings of Abbott would not have been significantly different from the reported amounts.

 

In December 2014, Abbott acquired control of Veropharm, a leading Russian pharmaceutical company for approximately $315 million, excluding assumed debt, plus a subsequent $5 million payment related to a working capital adjustment. Through this acquisition, Abbott establishes a manufacturing footprint in Russia and obtains a portfolio of medicines that is well aligned with Abbott’s current pharmaceutical therapeutic areas of focus.  Abbott acquired control of Veropharm through its purchase of Limited Liability Company Garden Hills, the holding company that owns approximately 98 percent of Veropharm.  Including the assumption of approximately $90 million of debt and a non-controlling interest with a fair value of $5 million, the total value of the acquired business was approximately $415 million.  The preliminary allocation of the fair value of the acquisition resulted in definite-lived non-deductible intangible assets of approximately $105 million, non-deductible goodwill of approximately $110 million, and net deferred tax liabilities of approximately $25 million.  Non-deductible goodwill is identifiable with the Established Pharmaceutical Products segment.  Additionally, Abbott acquired property, plant, and equipment of approximately $165 million, accounts receivable of approximately $45 million, inventory of approximately $25 million, and net other liabilities of approximately $10 million.  Acquired intangible assets consist of developed technology and are being amortized over 16 years. In 2015, Abbott acquired the remaining shares of Veropharm, increasing its ownership to 100 percent.

 

In December 2014, Abbott completed the acquisition of Topera, Inc. for approximately $250 million in cash plus additional payments up to $300 million to be made upon completion of certain regulatory and sales milestones.  The acquisition of Topera provides Abbott a foundational entry in the electrophysiology market.  The preliminary allocation of the fair value of the acquisition resulted in non-deductible acquired in-process research and development of approximately $20 million, which is accounted for as an indefinite-lived intangible asset until regulatory approval or discontinuation, non-deductible definite-lived intangible assets of approximately $325 million, non-deductible goodwill of approximately $105 million, net deferred tax liabilities of approximately $105 million, and contingent consideration of approximately $95 million.  The fair value of the contingent consideration was determined based on an independent appraisal.  Acquired intangible assets consist of developed technology and trademarks, and are being amortized over 16 years.

 

In August 2015, Abbott completed the acquisition of the equity of Tendyne Holdings, Inc. that Abbott did not already own for approximately $225 million in cash plus additional payments up to $135 million to be made upon completion of certain regulatory milestones. The acquisition of Tendyne, which is focused on developing minimally invasive mitral valve replacement therapies, allows Abbott to broaden its foundation in the treatment of mitral valve disease. The preliminary allocation of the fair value of the acquisition resulted in non-deductible acquired in-process research and development of approximately $240 million, which is accounted for as an indefinite-lived intangible asset until regulatory approval or discontinuation, non-deductible goodwill of approximately $155 million, net deferred tax liabilities of approximately $90 million, and contingent consideration of approximately $80 million.

 

The preliminary allocations of fair value will be finalized when valuations are completed.  Had the aggregate of the above acquisitions taken place as of the beginning of the comparable prior annual reporting period for each acquisition, consolidated net sales and earnings would not have been significantly different from reported amounts.

 

Note 6 — Goodwill and Intangible Assets

 

The total amount of goodwill reported was $9.750 billion at September 30, 2015 and $10.067 billion at December 31, 2014, which excluded goodwill classified as held for disposition.  As part of the disposal of the developed markets branded generics pharmaceuticals business in the first nine months of 2015, $894 million of goodwill was included as part of the net assets sold. In the first nine months of 2015, foreign currency translation adjustments decreased goodwill by approximately $273 million, while purchase price allocation adjustments associated with recent acquisitions decreased goodwill by approximately $44 million.  The amount of goodwill related to reportable segments at September 30, 2015 was $3.0 billion for the Established Pharmaceutical Products segment,

 

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Table of Contents

 

$286 million for the Nutritional Products segment, $449 million for the Diagnostic Products segment, and $3.0 billion for the Vascular Products segment.  There was no reduction of goodwill relating to impairments.

 

The gross amount of amortizable intangible assets, primarily product rights and technology was $10.8 billion as of September 30, 2015 and $11.0 billion as of December 31, 2014, and accumulated amortization was $5.3 billion as of September 30, 2015 and $4.9 billion as of December 31, 2014. The December 31, 2014 amounts exclude the intangibles that were classified as held for disposition. Intangibles of $738 million were included in the net assets transferred as part of the disposal of the developed markets branded generics pharmaceuticals business in the first nine months of 2015. Indefinite-lived intangible assets, which relate to in-process research and development acquired in a business combination, was approximately $377 million at September 30, 2015 and $134 million at December 31, 2014. Abbott’s estimated annual amortization expense for intangible assets is approximately $680 million in 2015, $660 million in 2016, $650 million in 2017, $570 million in 2018 and $530 million in 2019. Amortizable intangible assets are amortized over 2 to 20 years (weighted average 12 years).

 

Note 7 — Restructuring Plans

 

In 2015 and 2014, Abbott management approved plans to streamline operations in order to reduce costs and improve efficiencies in various Abbott businesses including the nutritional, established pharmaceuticals and vascular businesses. In the first nine months of 2015, charges of approximately $80 million were recognized, of which approximately $25 million is recorded in Cost of products sold, approximately $38 million is recorded in Research and Development and approximately $17 million is recorded in Selling, general and administrative expense. Additional charges of approximately $34 million were recorded primarily for accelerated depreciation. The following summarizes the activity for the first nine months of 2015 related to these restructuring actions and the status of the related accrual as of September 30, 2015:

 

(in millions)

 

 

 

Accrued balance at December 31, 2014

 

$

118

 

Restructuring charges recorded in 2015

 

80

 

Payments and other adjustments

 

(78

)

Accrued balance at September 30, 2015

 

$

120

 

 

From 2013 to 2015, Abbott management approved various plans to reduce costs and improve efficiencies across various functional areas. In the first nine months of 2015, charges of approximately $38 million were recognized, of which approximately $9 million is recorded in Cost of products sold, approximately $2 million is recorded in Research and Development, and approximately $27 million is recorded in Selling, general and administrative expense. In 2013, Abbott management also approved plans to streamline certain manufacturing operations in order to reduce costs and improve efficiencies in Abbott’s established pharmaceuticals business. In 2012, Abbott management approved plans to streamline various commercial operations in order to reduce costs and improve efficiencies in Abbott’s core diagnostics, established pharmaceuticals and nutritionals businesses. The following summarizes the activity for the first nine months of 2015 related to these restructuring actions and the status of the related accrual as of September 30, 2015:

 

(in millions)

 

 

 

Accrued balance at December 31, 2014

 

$

135

 

Restructuring charges recorded in 2015

 

38

 

Payments and other adjustments

 

(64

)

Accrued balance at September 30, 2015

 

$

109

 

 

In 2013 and prior years, Abbott management approved plans to realign its vascular manufacturing operations and core diagnostics business in order to reduce costs. The following summarizes the activity for the first nine months of 2015 related to these restructuring actions and the status of the related accrual as of September 30, 2015:

 

(in millions)

 

 

 

Accrued balance at December 31, 2014

 

$

39

 

Payments and other adjustments

 

(9

)

Accrued balance at September 30, 2015

 

$

30

 

 

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Table of Contents

 

Note 8 — Incentive Stock Programs

 

In the first nine months of 2015, Abbott granted 5,577,553 stock options, 662,553 restricted stock awards and 5,864,895 restricted stock units under its incentive stock programs.  At September 30, 2015, approximately 87 million shares were reserved for future grants.  Information regarding the number of stock options outstanding and exercisable at September 30, 2015 is as follows:

 

 

 

Outstanding

 

Exercisable

 

Number of shares

 

36,258,229

 

26,691,599

 

Weighted average remaining life (years)

 

4.7

 

3.2

 

Weighted average exercise price

 

$

31.23

 

$

26.94

 

Aggregate intrinsic value (in millions)

 

$

367

 

$

357

 

 

The total unrecognized share-based compensation cost at September 30, 2015 amounted to approximately $209 million which is expected to be recognized over the next three years.

 

Note 9 — Financial Instruments, Derivatives and Fair Value Measures

 

Certain Abbott foreign subsidiaries enter into foreign currency forward exchange contracts to manage exposures to changes in foreign exchange rates for anticipated intercompany purchases by those subsidiaries whose functional currencies are not the U.S. dollar.  These contracts, with notional amounts totaling $2.5 billion at September 30, 2015 and $1.5 billion at December 31, 2014 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, 2015 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 2015 and 2014.

 

Abbott enters into foreign currency forward exchange contracts to manage currency exposures for foreign currency denominated third-party trade payables and receivables, and for intercompany loans and trade accounts payable where the receivable or payable is denominated in a currency other than the functional currency of the entity.  For intercompany loans, the contracts require Abbott to sell or buy foreign currencies, primarily European currencies and Japanese yen, 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, European currencies and Japanese yen.  At September 30, 2015 and December 31, 2014, Abbott held $13.2 billion and $14.1 billion, respectively, of such foreign currency forward exchange contracts.

 

Abbott has designated foreign denominated short-term debt as a hedge of the net investment in a foreign subsidiary of approximately $442 million and approximately $445 million as of September 30, 2015 and December 31, 2014, respectively.  Accordingly, changes in the reported value of this debt due to changes in exchange rates are recorded in Accumulated other comprehensive income (loss), net of tax.

 

Abbott is a party to interest rate hedge contracts totaling approximately $4.0 billion at September 30, 2015 and $1.5 billion at December 31, 2014 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.  No hedge ineffectiveness was recorded in income in 2015 or 2014 for these hedges.

 

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Table of Contents

 

The following table summarizes the amounts and location of certain derivative financial instruments as of September 30, 2015 and December 31, 2014:

 

 

 

Fair Value - Assets

 

Fair Value - Liabilities

 

(in millions)

 

Sept. 30,
2015

 

Dec. 31,
2014

 

Balance Sheet Caption

 

Sept. 30,
2015

 

Dec. 31,
2014

 

Balance Sheet Caption

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest rate swaps designated as fair value hedges

 

$

172

 

$

101

 

Deferred income taxes and other assets

 

$

 

$

 

Post-employment obligations, deferred income taxes and other long-term liabilities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Foreign currency forward exchange contracts:

 

 

 

 

 

 

 

 

 

 

 

 

 

Hedging instruments

 

100

 

107

 

Prepaid expenses, deferred income taxes, and other receivables

 

20

 

 

Other accrued liabilities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Others not designated as hedges

 

107

 

150

 

Prepaid expenses, deferred income taxes, and other receivables

 

105

 

130

 

Other accrued liabilities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Debt designated as a hedge of net investment in a foreign subsidiary

 

 

 

n/a

 

442

 

445

 

Short-term borrowings

 

 

 

$

379

 

$

358

 

 

 

$

567

 

$

575

 

 

 

 

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, 2015 and 2014.  The amount of hedge ineffectiveness was not significant in 2015 and 2014 for these hedges.

 

 

 

Gain (loss) Recognized in Other
Comprehensive Income (loss)

 

Income (expense) and Gain (loss)
Reclassified into Income

 

 

 

 

 

Three Months
Ended Sept. 30

 

Nine Months
Ended Sept. 30

 

Three Months
Ended Sept. 30

 

Nine Months
Ended Sept. 30

 

Income Statement

 

(in millions)

 

2015

 

2014

 

2015

 

2014

 

2015

 

2014

 

2015

 

2014

 

Caption

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Foreign currency forward exchange contracts designated as cash flow hedges

 

$

41

 

$

58

 

$

89

 

$

56

 

$

33

 

$

2

 

$

80

 

$

7

 

Cost of products sold

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Debt designated as a hedge of net investment in a foreign subsidiary

 

(11

)

38

 

3

 

20

 

n/a

 

n/a

 

n/a

 

n/a

 

n/a

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest rate swaps designated as fair value hedges

 

n/a

 

n/a

 

n/a

 

n/a

 

85

 

(6

)

71

 

13

 

Interest expense

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Foreign currency forward exchange contracts not designated as hedges

 

n/a

 

n/a

 

n/a

 

n/a

 

9

 

76

 

(92

)

50

 

Net foreign exchange loss (gain)

 

 

The interest rate swaps are designated as fair value hedges of the variability of the fair value of fixed-rate debt due to changes in the long-term benchmark interest rates.  The hedged debt is marked to market, offsetting the effect of marking the interest rate swaps to market.

 

The carrying values and fair values of certain financial instruments as of September 30, 2015 and December 31, 2014 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.

 

14



Table of Contents

 

 

 

September 30, 2015

 

December 31, 2014

 

(in millions)

 

Carrying
Value

 

Fair
Value

 

Carrying
Value

 

Fair
Value

 

 

 

 

 

 

 

 

 

 

 

Investment Securities:

 

 

 

 

 

 

 

 

 

Equity securities

 

$

3,038

 

$

3,038

 

$

212

 

$

212

 

Other

 

17

 

17

 

17

 

17

 

Total Long-term Debt

 

(5,985

)

(6,493

)

(3,463

)

(4,113

)

Foreign Currency Forward Exchange Contracts:

 

 

 

 

 

 

 

 

 

Receivable position

 

207

 

207

 

263

 

263

 

(Payable) position

 

(125

)

(125

)

(135

)

(135

)

Interest Rate Hedge Contracts:

 

 

 

 

 

 

 

 

 

Receivable position

 

172

 

172

 

101

 

101

 

 

The fair value of the debt was determined based on significant other observable inputs, including current interest rates.

 

The following table summarizes the bases used to measure certain assets and liabilities at fair value on a recurring basis in the   balance sheet:

 

 

 

 

 

Basis of Fair Value Measurement

 

(in millions)

 

Outstanding
Balances

 

Quoted
Prices in
Active
Markets

 

Significant
Other
Observable
Inputs

 

Significant
Unobservable
Inputs

 

September 30, 2015:

 

 

 

 

 

 

 

 

 

Equity securities

 

$

2,817

 

$

2,817

 

$

 

$

 

Interest rate swap derivative financial instruments

 

172

 

 

172

 

 

Foreign currency forward exchange contracts

 

207

 

 

207

 

 

Total Assets

 

$

3,196

 

$

2,817

 

$

379

 

$

 

 

 

 

 

 

 

 

 

 

 

Fair value of hedged long-term debt

 

$

4,196

 

$

 

$

4,196

 

$

 

Foreign currency forward exchange contracts

 

125

 

 

125

 

 

Contingent consideration related to business combinations

 

180

 

 

 

180

 

Total Liabilities

 

$

4,501

 

$

 

$

4,321

 

$

180

 

 

 

 

 

 

 

 

 

 

 

December 31, 2014:

 

 

 

 

 

 

 

 

 

Equity securities

 

$

9

 

$

9

 

$

 

$

 

Interest rate swap derivative financial instruments

 

101

 

 

101

 

 

Foreign currency forward exchange contracts

 

263

 

 

263

 

 

Total Assets

 

$

373

 

$

9

 

$

364

 

$

 

 

 

 

 

 

 

 

 

 

 

Fair value of hedged long-term debt

 

$

1,637

 

$

 

$

1,637

 

$

 

Foreign currency forward exchange contracts

 

135

 

 

135

 

 

Contingent consideration related to business combinations

 

243

 

 

 

243

 

Total Liabilities

 

$

2,015

 

$

 

$

1,772

 

$

243

 

 

Equity securities are principally comprised of Mylan N.V. ordinary shares.  The fair value of the Mylan N.V. equity securities was determined based on the value of the publicly-traded ordinary shares. The fair value of debt was determined based on the face value of the debt adjusted for the fair value of the interest rate swaps, which is based on a discounted cash flow analysis. The fair value of foreign currency forward exchange contracts is determined using a market approach, which utilizes values for comparable derivative instruments.  The fair value of the contingent consideration was determined based on an independent appraisal adjusted for the time value of money and other changes in fair value primarily resulting from changes in regulatory timelines.

 

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Table of Contents

 

The following table summarizes the available-for-sale equity securities in an unrealized loss position:

 

(in millions)

 

September 30, 2015

 

December 31, 2014

 

Fair value of securities in an unrealized loss position

 

$

2,812

 

$

6

 

Unrealized gross losses

 

797

 

 

 

Available-for-sale securities are periodically assessed for other-than-temporary impairment losses.  Almost all of the unrealized losses relate to the holding of Mylan N.V. ordinary shares, which have been in an unrealized loss position for less than three months at September 30, 2015.  Factors considered in assessing other-than-temporary impairment losses include the length of time and the extent to which the fair value has been less than cost, the financial condition and near term prospects of the issuer, Abbott’s intent and ability to retain the securities for a period of time sufficient to allow for recovery in fair value, overall market conditions, and industry and company specific factors.  Based on that evaluation and Abbott’s ability and intent to hold these investments for a reasonable period of time sufficient for a forecasted recovery of fair value, Abbott does not consider these securities to be other-than-temporarily impaired at September 30, 2015.

 

Note 10 — Litigation and Environmental Matters

 

Abbott has been identified as a potentially responsible party for investigation and cleanup costs at a number of locations in the United States and Puerto Rico under federal and state remediation laws and is investigating potential contamination at a number of company-owned locations. Abbott has recorded an estimated cleanup cost for each site for which management believes Abbott has a probable loss exposure. No individual site cleanup exposure is expected to exceed $4 million, and the aggregate cleanup exposure is not expected to exceed $15 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 $50 million to $65 million. The recorded accrual balance at September 30, 2015 for these proceedings and exposures was approximately $60 million. This accrual represents management’s best estimate of probable loss, as defined by FASB ASC No. 450, “Contingencies.” Within the next year, legal proceedings may occur that may result in a change in the estimated loss accrued by Abbott. While it is not feasible to predict the outcome of all such proceedings and exposures with certainty, management believes that their ultimate disposition should not have a material adverse effect on Abbott’s financial position, cash flows, or results of operations.

 

Note 11 — Post-Employment Benefits

 

Retirement plans consist of defined benefit, defined contribution, and medical and dental plans.  Net cost recognized in continuing operations for the three months 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 Sept. 30

 

Ended Sept. 30

 

Ended Sept. 30

 

Ended Sept. 30

 

(in millions)

 

2015

 

2014

 

2015

 

2014

 

2015

 

2014

 

2015

 

2014

 

Service cost — benefits earned during the period

 

$

80

 

$

61

 

$

230

 

$

184

 

$

9

 

$

9

 

$

24

 

$

27

 

Interest cost on projected benefit obligations

 

78

 

73

 

234

 

222

 

14

 

16

 

39

 

48

 

Expected return on plan assets

 

(128

)

(109

)

(385

)

(330

)

(10

)

(10

)

(29

)

(29

)

Net amortization of:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Actuarial loss, net

 

47

 

23

 

136

 

71

 

8

 

5

 

18

 

14

 

Prior service cost (credit)

 

 

1

 

 

2

 

(12

)

(9

)

(36

)

(27

)

Total Cost

 

77

 

49

 

215

 

149

 

9

 

11

 

16

 

33

 

Less: Discontinued operations

 

 

4

 

1

 

12

 

 

 

 

 

Net cost - continuing operations

 

$

77

 

$

45

 

$

214

 

$

137

 

$

9

 

$

11

 

$

16

 

$

33

 

 

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Table of Contents

 

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 2015 and 2014, $551 million and $350 million, respectively, were contributed to defined benefit plans and $24 million and $40 million were contributed to the post-employment medical and dental benefit plans in the first nine months of 2015 and 2014, respectively.

 

Note 12 — Taxes on Earnings

 

Taxes on earnings from continuing operations reflect the estimated annual effective rates and include charges for interest and penalties. In the first nine months of 2015, taxes on earnings from continuing operations include a tax cost of $71 million related to the disposal of shares of Mylan N.V. stock.  Taxes on earnings from continuing operations were not affected by any adjustments as a result of the resolution of various tax positions pertaining to prior years. Tax expense related to discontinued operations includes $667 million of tax expense on certain current-year funds earned outside the U.S. that were not designated as permanently reinvested overseas. Earnings from discontinued operations, net of tax, in the first nine months of 2015 also reflects the recognition of $10 million of net tax expense primarily as a result of the resolution of various tax positions related to AbbVie’s operations for years prior to the separation. The conclusion of these tax matters decreased the gross amount of unrecognized tax benefits by approximately $16 million. Taxes on earnings from continuing operations, in the first nine months of 2014, reflect a tax cost of $37 million, primarily as a result of the resolution of various tax positions related to the branded generics pharmaceutical business and the impact of changes in the Chilean tax rate.  Earnings from discontinued operations, net of tax, in the first nine months of 2014 reflects the recognition of $101 million of net tax benefits primarily as a result of the resolution of various tax positions related to the developed markets branded generics pharmaceuticals business, as well as AbbVie’s operations, for years prior to the separation. The conclusion of these tax matters decreased the gross amount of unrecognized tax benefits by approximately $134 million.

 

Tax authorities in various jurisdictions regularly review Abbott’s income tax filings.  Abbott believes that it is reasonably possible that the recorded amount of gross unrecognized tax benefits may decrease by $525 million to $635 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 2011 are settled except for two issues.

 

Note 13 — Segment Information

 

Abbott’s principal business is the discovery, development, manufacture and sale of a broad line of health care products.  Abbott’s products are generally sold directly to retailers, wholesalers, hospitals, health care facilities, laboratories, physicians’ offices and government agencies throughout the world.  Abbott’s reportable segments are as follows:

 

Established Pharmaceutical Products — International sales of a broad line of branded generic pharmaceutical products.

 

Nutritional Products — Worldwide sales of a broad line of adult and pediatric nutritional products.

 

Diagnostic Products — Worldwide sales of diagnostic systems and tests for blood banks, hospitals, commercial laboratories and alternate-care testing sites.  For segment reporting purposes, the Core Laboratories Diagnostics, Molecular Diagnostics, Point of Care and Ibis diagnostic divisions are aggregated and reported as the Diagnostic Products segment.

 

Vascular Products — Worldwide sales of coronary, endovascular, structural heart, vessel closure and other medical device products. For segment reporting purposes, the Vascular and Electrophysiology Products divisions are aggregated and reported as the Vascular Products segment.

 

Non-reportable segments include the Diabetes Care and Medical Optics segments.

 

On February 27, 2015, Abbott completed the sale of its developed markets branded generics pharmaceuticals business to Mylan.  This business was previously included in the Established Pharmaceutical Products segment for the first nine months of 2014; therefore, the 2014 segment information below has been adjusted to reflect the classification of the developed markets branded generics pharmaceuticals business as part of discontinued operations in the Condensed Consolidated Statement of Earnings.

 

Abbott’s underlying accounting records are maintained on a legal entity basis for government and public reporting requirements.  Segment disclosures are on a performance basis consistent with internal management reporting.  Intersegment transfers of inventory are recorded at standard cost and are not a measure of segment operating earnings.  The cost of some corporate functions and the cost of certain employee benefits are charged to segments at predetermined rates that approximate cost.  Remaining costs, if any, are not allocated to segments.  In addition, intangible asset amortization is not allocated to operating segments, and intangible assets and goodwill are not included in the measure of each segment’s assets.  The following segment information has been prepared in accordance with the internal accounting policies of Abbott, as described above, and are not presented in accordance with generally accepted accounting principles applied to the consolidated financial statements.

 

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Table of Contents

 

 

 

Net Sales to External Customers

 

Operating Earnings

 

 

 

Three Months

 

Nine Months

 

Three Months

 

Nine Months

 

 

 

Ended Sept. 30

 

Ended Sept. 30

 

Ended Sept. 30

 

Ended Sept. 30

 

(in millions)

 

2015

 

2014

 

2015

 

2014

 

2015

 

2014

 

2015

 

2014

 

Established Pharmaceutical Products

 

$

961

 

$

771

 

$

2,835

 

$

2,196

 

$

177

 

$

160

 

$

516

 

$

441

 

Nutritional Products

 

1,789

 

1,787

 

5,175

 

5,149

 

459

 

369

 

1,198

 

954

 

Diagnostic Products

 

1,156

 

1,180

 

3,426

 

3,486

 

307

 

310

 

887

 

810

 

Vascular Products

 

672

 

730

 

2,092

 

2,232

 

239

 

280

 

803

 

804

 

Total Reportable Segments

 

4,578

 

4,468

 

13,528

 

13,063

 

1,182

 

1,119

 

3,404

 

3,009

 

Other

 

572

 

611

 

1,689

 

1,828

 

 

 

 

 

 

 

 

 

Net Sales

 

$

5,150

 

$

5,079

 

$

15,217

 

$

14,891

 

 

 

 

 

 

 

 

 

Corporate functions and benefit plans costs

 

 

 

 

 

 

 

 

 

(109

)

(76

)

(330

)

(237

)

Non-reportable segments

 

 

 

 

 

 

 

 

 

76

 

124

 

193

 

297

 

Net interest expense

 

 

 

 

 

 

 

 

 

(16

)

(17

)

(49

)

(54

)

Share-based compensation (a)

 

 

 

 

 

 

 

 

 

(43

)

(39

)

(248

)

(203

)

Amortization of intangible assets

 

 

 

 

 

 

 

 

 

(151

)

(132

)

(458

)

(392

)

Other, net (b)

 

 

 

 

 

 

 

 

 

(225

)

(264

)

(159

)

(706

)

Consolidated Earnings from Continuing Operations Before Taxes

 

 

 

 

 

 

 

 

 

$

714

 

$

715

 

$

2,353

 

$

1,714

 

 


(a)         Approximately 40 to 45 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 nine months ended September 30, 2015 includes a gain on the sale of a portion of Abbott’s position in Mylan N.V. stock and a decrease in the fair value of contingent consideration related to a business acquisition, which was partially offset by charges associated with cost reduction initiatives.

 

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Table of Contents

 

Item 2.  Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

Financial Review - Results of Operations

 

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.

 

 

 

Net Sales to External Customers

 

(in millions)

 

Three Months
ended
Sept. 30,
2015

 

Three Months
ended
Sept. 30,
2014

 

Total
Change

 

Impact of
Foreign
Exchange

 

Total Change
Excl. Foreign
Exchange

 

 

 

 

 

 

 

 

 

 

 

 

 

Established Pharmaceutical Products

 

$

961

 

$

771

 

24.6

%

(18.0

)%

42.6

%

Nutritional Products

 

1,789

 

1,787

 

0.2

 

(6.3

)

6.5

 

Diagnostic Products

 

1,156

 

1,180

 

(2.1

)

(10.0

)

7.9

 

Vascular Products

 

672

 

730

 

(7.8

)

(8.3

)

0.5

 

Total Reportable Segments

 

4,578

 

4,468

 

2.5

 

(9.6

)

12.1

 

Other

 

572

 

611

 

(6.6

)

(8.8

)

2.2

 

Net Sales

 

$

5,150

 

$

5,079

 

1.4

 

(9.5

)

10.9

 

 

 

 

 

 

 

 

 

 

 

 

 

Total U.S.

 

$

1,574

 

$

1,561

 

0.8

 

 

0.8

 

 

 

 

 

 

 

 

 

 

 

 

 

Total International

 

$

3,576

 

$

3,518

 

1.6

 

(13.8

)

15.4

 

 

 

 

Net Sales to External Customers

 

(in millions)

 

Nine Months
ended
Sept. 30,
2015

 

Nine Months
ended
Sept. 30,
2014

 

Total
Change

 

Impact of
Foreign
Exchange

 

Total Change
Excl. Foreign
Exchange

 

 

 

 

 

 

 

 

 

 

 

 

 

Established Pharmaceutical Products

 

$

2,835

 

$

2,196

 

29.1

%

(14.8

)%

43.9

%

Nutritional Products

 

5,175

 

5,149

 

0.5

 

(5.0

)

5.5

 

Diagnostic Products

 

3,426

 

3,486

 

(1.7

)

(9.2

)

7.5

 

Vascular Products

 

2,092

 

2,232

 

(6.3

)

(8.3

)

2.0

 

Total Reportable Segments

 

13,528

 

13,063

 

3.6

 

(8.4

)

12.0

 

Other

 

1,689

 

1,828

 

(7.6

)

(8.7

)

1.1

 

Net Sales

 

$

15,217

 

$

14,891

 

2.2

 

(8.4

)

10.6

 

 

 

 

 

 

 

 

 

 

 

 

 

Total U.S.

 

$

4,668

 

$

4,582

 

1.9

 

 

1.9

 

 

 

 

 

 

 

 

 

 

 

 

 

Total International

 

$

10,549

 

$

10,309

 

2.3

 

(12.2

)

14.5

 

 

Net sales growth in the third quarter and first nine months of 2015 was negatively impacted by changes in foreign currency exchange rates.  The relatively stronger U.S. dollar decreased total international sales by 13.8 percent and total sales by 9.5 percent in the third quarter. Excluding the unfavorable impact of foreign exchange and including the impact of the 2014 acquisitions of CFR Pharmaceuticals and Veropharm, total net sales increased 10.9 percent in the third quarter of 2015, driven by growth in the Established Pharmaceuticals, Diagnostics and Nutritional Products business segments.  Double-digit growth in emerging market sales was a significant contributor to the 15.4 percent increase in total international sales excluding the impact of foreign exchange for the third quarter of 2015.

 

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Table of Contents

 

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.

 

(in millions)

 

Sept. 30,
2015

 

Sept. 30,
2014

 

Total
Change

 

Impact of
Foreign
Exchange

 

Total Change
Excl. Foreign
Exchange

 

Established Pharmaceutical Products sales —

 

 

 

 

 

 

 

 

 

 

 

Key Emerging Markets

 

$

2,078

 

$

1,649

 

26.0

%

(15.5

)%

41.5

%

Other

 

757

 

547

 

38.3

 

(12.7

)

51.0

 

 

 

 

 

 

 

 

 

 

 

 

 

Nutritionals —

 

 

 

 

 

 

 

 

 

 

 

U.S. Pediatric Nutritionals

 

1,183

 

1,146

 

3.2

 

 

3.2

 

International Pediatric Nutritionals