10-Q 1 a16-11615_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 June 30, 2016

 

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 June 30, 2016, Abbott Laboratories had 1,469,995,415 common shares without par value outstanding.

 

 

 



Table of Contents

 

Abbott Laboratories

 

Table of Contents

 

 

 

Page

Part I - Financial Information

 

 

 

 

 

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 1A. Risk Factors

 

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

 

Six Months Ended

 

 

 

June 30

 

June 30

 

 

 

2016

 

2015

 

2016

 

2015

 

Net sales

 

$

5,333

 

$

5,170

 

$

10,218

 

$

10,067

 

 

 

 

 

 

 

 

 

 

 

Cost of products sold, excluding amortization of intangible assets

 

2,287

 

2,218

 

4,427

 

4,299

 

Amortization of intangible assets

 

145

 

151

 

289

 

307

 

Research and development

 

348

 

345

 

727

 

658

 

Selling, general and administrative

 

1,737

 

1,727

 

3,435

 

3,464

 

Total operating cost and expenses

 

4,517

 

4,441

 

8,878

 

8,728

 

 

 

 

 

 

 

 

 

 

 

Operating earnings

 

816

 

729

 

1,340

 

1,339

 

 

 

 

 

 

 

 

 

 

 

Interest expense

 

103

 

44

 

161

 

81

 

Interest (income)

 

(20

)

(27

)

(53

)

(48

)

Net foreign exchange loss (gain)

 

10

 

5

 

488

 

(49

)

Other expense (income), net

 

8

 

(279

)

27

 

(284

)

Earnings from continuing operations before taxes

 

715

 

986

 

717

 

1,639

 

Taxes on earnings from continuing operations

 

116

 

200

 

62

 

324

 

Earnings from continuing operations

 

599

 

786

 

655

 

1,315

 

 

 

 

 

 

 

 

 

 

 

Earnings (loss) from discontinued operations, net of tax

 

16

 

(1

)

260

 

25

 

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

 

 

(1

)

16

 

1,736

 

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

 

16

 

(2

)

276

 

1,761

 

 

 

 

 

 

 

 

 

 

 

Net Earnings

 

$

615

 

$

784

 

$

931

 

$

3,076

 

 

 

 

 

 

 

 

 

 

 

Basic Earnings Per Common Share —

 

 

 

 

 

 

 

 

 

Continuing operations

 

$

0.40

 

$

0.52

 

$

0.44

 

$

0.87

 

Discontinued operations

 

0.01

 

 

0.19

 

1.17

 

Net earnings

 

$

0.41

 

$

0.52

 

$

0.63

 

$

2.04

 

 

 

 

 

 

 

 

 

 

 

Diluted Earnings Per Common Share —

 

 

 

 

 

 

 

 

 

Continuing operations

 

$

0.40

 

$

0.52

 

$

0.44

 

$

0.87

 

Discontinued operations

 

0.01

 

 

0.19

 

1.16

 

Net earnings

 

$

0.41

 

$

0.52

 

$

0.63

 

$

2.03

 

 

 

 

 

 

 

 

 

 

 

Cash Dividends Declared Per Common Share

 

$

0.26

 

$

0.24

 

$

0.52

 

$

0.48

 

 

 

 

 

 

 

 

 

 

 

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

 

1,474,504

 

1,493,771

 

1,476,161

 

1,500,285

 

Dilutive Common Stock Options

 

5,988

 

10,444

 

6,165

 

10,676

 

 

 

 

 

 

 

 

 

 

 

Average Number of Common Shares Outstanding Plus Dilutive Common Stock Options

 

1,480,492

 

1,504,215

 

1,482,326

 

1,510,961

 

 

 

 

 

 

 

 

 

 

 

Outstanding Common Stock Options Having No Dilutive Effect

 

5,673

 

658

 

5,673

 

658

 

 

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

 

Six Months Ended

 

 

 

June 30

 

June 30

 

 

 

2016

 

2015

 

2016

 

2015

 

Net Earnings

 

$

615

 

$

784

 

$

931

 

$

3,076

 

Foreign currency translation (loss) gain adjustments

 

(104

)

84

 

317

 

(827

)

Net actuarial gains (losses) and amortization of net actuarial (losses) and prior service (cost) and credits, net of taxes of $(12) and $(3) in 2016 and $10 and $25 in 2015

 

(47

)

22

 

(29

)

53

 

Unrealized gains (losses) on marketable equity securities, net of taxes of nil in 2016 and $256 and $344 in 2015

 

(213

)

522

 

(756

)

695

 

Net gains (losses) for derivative instruments designated as cash flow hedges and other, net of taxes of $(2) and $(24) in 2016 and $(6) and nil in 2015

 

(8

)

(25

)

(97

)

1

 

Other comprehensive income (loss)

 

(372

)

603

 

(565

)

(78

)

Comprehensive Income

 

$

243

 

$

1,387

 

$

366

 

$

2,998

 

 

 

 

 

 

 

 

 

June 30,
2016

 

December 31,
2015

 

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

 

 

 

 

 

Cumulative foreign currency translation (loss) adjustments

 

$

(4,512

)

$

(4,829

)

Net actuarial (losses) and prior service cost and credits

 

(1,987

)

(1,958

)

Cumulative unrealized (losses) gains on marketable equity securities

 

(691

)

65

 

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

 

(33

)

64

 

 

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)

 

 

 

June 30,
2016

 

December 31,
2015

 

Assets

 

 

 

 

 

Current Assets:

 

 

 

 

 

Cash and cash equivalents

 

$

2,578

 

$

5,001

 

Short-term investments

 

1,860

 

1,124

 

Trade receivables, less allowances of $347 in 2016 and $337 in 2015

 

3,567

 

3,418

 

Inventories:

 

 

 

 

 

Finished products

 

1,865

 

1,744

 

Work in process

 

340

 

316

 

Materials

 

608

 

539

 

Total inventories

 

2,813

 

2,599

 

Prepaid expenses and other receivables

 

2,104

 

1,908

 

Current assets held for disposition

 

66

 

105

 

Total Current Assets

 

12,988

 

14,155

 

Investments

 

3,339

 

4,041

 

Property and equipment, at cost

 

12,712

 

12,383

 

Less: accumulated depreciation and amortization

 

6,886

 

6,653

 

Net property and equipment

 

5,826

 

5,730

 

Intangible assets, net of amortization

 

5,311

 

5,562

 

Goodwill

 

9,752

 

9,638

 

Deferred income taxes and other assets

 

2,613

 

2,119

 

Non-current assets held for disposition

 

2

 

2

 

 

 

$

39,831

 

$

41,247

 

Liabilities and Shareholders’ Investment

 

 

 

 

 

Current Liabilities:

 

 

 

 

 

Short-term borrowings

 

$

2,892

 

$

3,127

 

Trade accounts payable

 

1,153

 

1,081

 

Salaries, wages and commissions

 

717

 

746

 

Other accrued liabilities

 

2,931

 

3,043

 

Dividends payable

 

383

 

383

 

Income taxes payable

 

232

 

430

 

Current portion of long-term debt

 

4

 

3

 

Current liabilities held for disposition

 

361

 

373

 

Total Current Liabilities

 

8,673

 

9,186

 

Long-term debt

 

6,016

 

5,871

 

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

 

4,347

 

4,864

 

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: 2016: 1,705,266,590; 2015: 1,702,017,390

 

12,835

 

12,734

 

Common shares held in treasury, at cost — Shares: 2016: 235,271,175; 2015: 229,352,338

 

(10,821

)

(10,622

)

Earnings employed in the business

 

25,884

 

25,757

 

Accumulated other comprehensive income (loss)

 

(7,223

)

(6,658

)

Total Abbott Shareholders’ Investment

 

20,675

 

21,211

 

Noncontrolling Interests in Subsidiaries

 

120

 

115

 

Total Shareholders’ Investment

 

20,795

 

21,326

 

 

 

$

39,831

 

$

41,247

 

 

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)

 

 

 

Six Months Ended June 30

 

 

 

2016

 

2015

 

Cash Flow From (Used in) Operating Activities:

 

 

 

 

 

Net earnings

 

$

931

 

$

3,076

 

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

 

 

 

 

 

Depreciation

 

405

 

416

 

Amortization of intangible assets

 

289

 

307

 

Share-based compensation

 

214

 

205

 

Impact of currency devaluation

 

477

 

 

Gain on sale of discontinued operations

 

(25

)

(2,820

)

Gain on sale of Mylan shares

 

 

(207

)

Trade receivables

 

(150

)

(125

)

Inventories

 

(149

)

(210

)

Other, net

 

(1,176

)

301

 

Net Cash From Operating Activities

 

816

 

943

 

 

 

 

 

 

 

Cash Flow From (Used in) Investing Activities:

 

 

 

 

 

Acquisitions of property and equipment

 

(490

)

(451

)

Proceeds from business disposition

 

25

 

230

 

Acquisitions of businesses and technologies, net of cash acquired

 

(7

)

(4

)

Proceeds from the sale of Mylan shares

 

 

2,290

 

Sales (Purchases) of other investment securities, net

 

(800

)

(2,056

)

Other

 

28

 

28

 

Net Cash (Used in) From Investing Activities

 

(1,244

)

37

 

 

 

 

 

 

 

Cash Flow From (Used in) Financing Activities:

 

 

 

 

 

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

 

(285

)

(1,518

)

Proceeds from the issuance of long-term debt

 

 

2,485

 

Repayments of long-term debt

 

(10

)

(33

)

Payment of debt issuance costs

 

(132

)

 

Payment of contingent consideration

 

(25

)

 

Purchases of common shares

 

(520

)

(1,347

)

Proceeds from stock options exercised, including income tax benefit

 

130

 

213

 

Dividends paid

 

(769

)

(724

)

Net Cash (Used in) Financing Activities

 

(1,611

)

(924

)

 

 

 

 

 

 

Effect of exchange rate changes on cash and cash equivalents

 

(384

)

(71

)

 

 

 

 

 

 

Net Decrease in Cash and Cash Equivalents

 

(2,423

)

(15

)

Cash and Cash Equivalents, Beginning of Year

 

5,001

 

4,063

 

Cash and Cash Equivalents, End of Period

 

$

2,578

 

$

4,048

 

 

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

 

June 30, 2016

 

(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, 2015.  The consolidated financial statements include the accounts of the parent company and subsidiaries, after elimination of intercompany transactions.

 

Note 2 — Discontinued Operations

 

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

 

At the close of this transaction, Abbott and Mylan entered into a transition services agreement 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 this transition services agreement 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 services and manufacturing supply agreements are not expected to be significant, and therefore, these cash flows are not direct cash flows of the disposed component under Accounting Standards Codification 205.

 

In April 2015, Abbott sold 40.25 million of the 110 million ordinary shares of Mylan N.V. received in the sale of the developed markets branded generics pharmaceuticals business to Mylan.  In the second quarter 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 was recognized in the Other (income) expense line of the Condensed Consolidated Statement of Earnings.  As a result of this sale, Abbott’s ownership interest in Mylan N.V. decreased to approximately 14%.

 

On February 10, 2015, Abbott completed the sale of its animal health business to Zoetis Inc.  Abbott received cash proceeds of $230 million and reported an after-tax gain on the sale of approximately $130 million in the first quarter of 2015. In the first quarter of 2016, Abbott received an additional $25 million of proceeds related to the expiration of a holdback agreement associated with the sale of this business and reported an after-tax gain on the sale of discontinued operations of $16 million.

 

As a result of the disposition of the above businesses, the 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. The cash flows associated with the developed markets branded generics pharmaceuticals and animal health businesses up to the date of disposition are included in Abbott’s Condensed Consolidated Statement of Cash Flows.

 

On January 1, 2013, Abbott completed the separation of AbbVie Inc. (AbbVie), which was formed to hold Abbott’s research-based proprietary pharmaceuticals business. For a small portion of AbbVie’s operations, the legal transfer of AbbVie’s assets (net of liabilities) did not occur with the separation of AbbVie on January 1, 2013 due to the time required to transfer marketing authorizations and other regulatory requirements in each of these countries.  Under the terms of the separation agreement with Abbott, AbbVie is subject to the risks and entitled to the benefits generated by these operations and assets.  The majority of these operations were transferred to AbbVie in 2013 and 2014.  These assets and liabilities have been presented as held for disposition in the

 

7



Table of Contents

 

Condensed Consolidated Balance Sheet. Abbott has recorded a prepaid asset of $293 million for its obligation to transfer these net liabilities held for disposition to AbbVie.

 

Abbott has retained all liabilities for all U.S. federal and foreign income taxes on income prior to the separation, as well as certain non-income related taxes attributable to AbbVie’s business prior to the separation. AbbVie generally will be liable for all other taxes attributable to its business. Net earnings from discontinued operations in the first six months of 2016 and 2015 reflect the recognition of $263 million and $17 million, respectively, of net tax benefits as a result of the resolution of various tax positions related to AbbVie’s operations for years prior to the separation.

 

The following table summarizes the components of discontinued operations:

 

 

 

Three Months Ended
June 30

 

Six Months Ended
June 30

 

(in millions)

 

2016

 

2015

 

2016

 

2015

 

Net Sales

 

 

 

 

 

 

 

 

 

Developed markets generics pharmaceuticals and animal health businesses

 

$

 

$

 

$

 

$

256

 

AbbVie

 

 

 

 

 

Total

 

$

 

$

 

$

 

$

256

 

Earnings (Loss) Before Tax

 

 

 

 

 

 

 

 

 

Developed markets generics pharmaceuticals and animal health businesses

 

$

(3

)

$

(5

)

$

(6

)

$

20

 

AbbVie

 

 

 

 

 

Total

 

$

(3

)

$

(5

)

$

(6

)

$

20

 

Income Tax Expense (Benefit)

 

 

 

 

 

 

 

 

 

Developed markets generics pharmaceuticals and animal health businesses

 

$

 

$

 

$

(3

)

$

12

 

AbbVie

 

(19

)

(4

)

(263

)

(17

)

Total

 

$

(19

)

$

(4

)

$

(266

)

$

(5

)

Net Earnings (Loss)

 

 

 

 

 

 

 

 

 

Developed markets generics pharmaceuticals and animal health businesses

 

$

(3

)

$

(5

)

$

(3

)

$

8

 

AbbVie

 

19

 

4

 

263

 

17

 

Total

 

$

16

 

$

(1

)

$

260

 

$

25

 

 

The sale of the developed markets branded generics pharmaceuticals and animal health businesses in the first six months of 2015 resulted in the recognition of a pretax gain of $2.820 billion, tax expense of $1.084 billion and an after-tax gain of $1.736 billion.

 

The assets and liabilities held for disposition as of June 30, 2016 and December 31, 2015, relate to the AbbVie businesses. The following is a summary of the assets and liabilities held for disposition:

 

(in millions)

 

June 30,
2016

 

December 31,
2015

 

Cash and Trade receivables, net

 

$

41

 

$

54

 

Total inventories

 

20

 

43

 

Prepaid expenses and other receivables

 

5

 

8

 

Current assets held for disposition

 

66

 

105

 

Net property and equipment

 

1

 

1

 

Deferred income taxes and other assets

 

1

 

1

 

Non-current assets held for disposition

 

2

 

2

 

Total assets held for disposition

 

$

68

 

$

107

 

 

 

 

 

 

 

Trade accounts payable

 

$

360

 

$

359

 

Salaries, wages, commissions and other accrued liabilities

 

1

 

14

 

Current liabilities held for disposition

 

361

 

373

 

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

 

 

 

Total liabilities held for disposition

 

$

361

 

$

373

 

 

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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 June 30, 2016 and 2015 were $597 million and $783 million, respectively and for the six months ended June 30, 2016 and 2015 were $652 million and $1.3 billion, respectively.  Net earnings allocated to common shares for the three months ended June 30, 2016 and 2015 were $612 million and $780 million, respectively, and for the six months ended June 30, 2016 and 2015 were $927 million and $3.1 billion, respectively.

 

Other (income) expense, net in the second quarter of 2015 primarily relates to a $207 million gain on the sale of a portion of Abbott’s position in Mylan stock and $79 million of income resulting from a decrease in the fair value of contingent consideration related to a business acquisition.  In the second quarter 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 six months of 2016 and 2015 includes the effects of contributions to defined benefit plans of $524 million and $547 million, respectively, and to the post-employment medical and dental benefit plans of $9 million and $24 million, respectively. The first six months of 2016 also includes the non-cash impact of approximately $410 million of net tax benefits primarily associated with the resolution of various tax positions from prior years, as well as cash taxes paid of approximately $140 million related to the disposition of businesses. The first six months of 2015 includes the non-cash impact of approximately $1.1 billion of tax expense associated with the gain on the sale of businesses. The foreign currency loss related to Venezuela in the first six months of 2016 reduced Abbott’s cash by approximately $410 million and is shown on the Effect of exchange rate changes on cash and cash equivalents line within the Condensed Consolidated Statement of Cash Flows.

 

Since January 2010, Venezuela has been designated as a highly inflationary economy under U.S. GAAP.  In 2014 and 2015, the government of Venezuela operated multiple mechanisms to exchange bolivars into U.S. dollars. These mechanisms included the CENCOEX, SICAD, and SIMADI rates, which stood at 6.3, 13.5, and approximately 200, respectively, at December 31, 2015. In 2015, Abbott continued to use the CENCOEX rate of 6.3 Venezuelan bolivars to the U.S. dollar to report the results, financial position, and cash flows related to its operations in Venezuela since Abbott continued to qualify for this exchange rate to pay for the import of various products into Venezuela.

 

On February 17, 2016, the Venezuelan government announced that the three-tier exchange rate system would be reduced to two rates renamed the DIPRO and DICOM rates.  The DIPRO rate is the official rate for food and medicine imports and was adjusted from 6.3 to 10 bolivars per U.S. dollar.  The DICOM rate is a floating market rate published daily by the Venezuelan central bank, which at the end of the first quarter of 2016 was approximately 263 bolivars per U.S. dollar.  As a result of decreasing government approvals to convert bolivars to U.S. dollars to pay for intercompany accounts, as well as the accelerating deterioration of economic conditions in the country, Abbott concluded that it was appropriate to move to the DICOM rate at the end of the first quarter of 2016.  As a result, Abbott recorded a foreign currency loss of $477 million in the first quarter of 2016 to revalue its net monetary assets in Venezuela.  Abbott is continuing to use the DICOM rate to report the results of operations and to remeasure net monetary assets for Venezuela at the end of each quarter.  As of June 30, 2016, Abbott’s Venezuelan operations represented approximately 0.1% of Abbott’s consolidated assets and any additional foreign currency losses related to Venezuela are not expected to be material.

 

The components of long-term investments as of June 30, 2016 and December 31, 2015 are as follows:

 

Long-term Investments

 

June 30,

 

December 31,

 

(in millions)

 

2016

 

2015

 

Equity securities

 

$

3,288

 

$

4,014

 

Other

 

51

 

27

 

Total

 

$

3,339

 

$

4,041

 

 

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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 June 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
(Losses) on
Derivative
Instruments
Designated as
Cash Flow Hedges

 

(in millions)

 

2016

 

2015

 

2016

 

2015

 

2016

 

2015

 

2016

 

2015

 

Balance at March 31

 

$

(4,408

)

$

(3,727

)

$

(1,940

)

$

(2,179

)

$

(478

)

$

174

 

$

(25

)

$

125

 

Other comprehensive income (loss) before reclassifications

 

(104

)

84

 

(62

)

 

(213

)

660

 

11

 

5

 

Amounts reclassified from accumulated other comprehensive income

 

 

 

15

 

22

 

 

(138

)

(19

)

(30

)

Net current period comprehensive income (loss)

 

(104

)

84

 

(47

)

22

 

(213

)

522

 

(8

)

(25

)

Balance at June 30

 

$

(4,512

)

$

(3,643

)

$

(1,987

)

$

(2,157

)

$

(691

)

$

696

 

$

(33

)

$

100

 

 

 

 

 

 

 

Six Months Ended June 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
(Losses) on
Derivative
Instruments
Designated as
Cash Flow Hedges

 

(in millions)

 

2016

 

2015

 

2016

 

2015

 

2016

 

2015

 

2016

 

2015

 

Balance at December 31, 2015 and 2014

 

$

(4,829

)

$

(2,924

)

$

(1,958

)

$

(2,229

)

$

65

 

$

1

 

$

64

 

$

99

 

Impact of business dispositions

 

 

108

 

 

19

 

 

 

 

 

Other comprehensive income (loss) before reclassifications

 

317

 

(827

)

(62

)

 

(756

)

833

 

(47

)

48

 

Amounts reclassified from accumulated other comprehensive income

 

 

 

33

 

53

 

 

(138

)

(50

)

(47

)

Net current period comprehensive income (loss)

 

317

 

(827

)

(29

)

53

 

(756

)

695

 

(97

)

1

 

Balance at June 30

 

$

(4,512

)

$

(3,643

)

$

(1,987

)

$

(2,157

)

$

(691

)

$

696

 

$

(33

)

$

100

 

 

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

 

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Note 5 — Business Acquisitions

 

In August 2015, Abbott completed the acquisition of the equity of Tendyne Holdings, Inc. (Tendyne) that Abbott did not already own for approximately $225 million in cash plus additional payments up to $150 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 $220 million, which is accounted for as an indefinite-lived intangible asset until regulatory approval or discontinuation, non-deductible goodwill of approximately $142 million, other assets of approximately $13 million, net deferred tax liabilities of approximately $80 million, and contingent consideration of approximately $70 million. The preliminary allocations of the fair value of this acquisition will be finalized when the valuation is completed.

 

Had this acquisition taken place as of the beginning of the comparable prior annual reporting period, consolidated net sales and earnings would not have been significantly different from reported amounts.

 

On January 30, 2016, Abbott entered into a definitive agreement to acquire Alere Inc. (Alere). With annual sales of approximately $2.5 billion, Alere is a global leader in point of care diagnostics.  The acquisition, which is expected to significantly advance Abbott’s global diagnostics presence and leadership, is subject to the approval of Alere shareholders and the satisfaction of customary closing conditions, including applicable regulatory approvals. On March 15, 2016, Alere filed a Form 8-K stating that it will not be able to file its 2015 Form 10-K until it completes its analysis of the timing of revenue recognition in Africa and China.  In its Form 8-K, Alere also stated that it does not expect to mail a definitive proxy statement related to obtaining the Alere shareholders’ approval of the acquisition by Abbott until after Alere files its 2015 Form 10-K.  On May 2, 2016, Abbott and Alere received a request for additional information from the United States Federal Trade Commission (FTC) relating to Abbott’s potential acquisition of Alere. The effect of this request, which was issued under the Hart-Scott Rodino (HSR) Antitrust Improvements Act of 1976, as amended, is to extend the waiting period imposed by the HSR Act until 30 days after Abbott and Alere have substantially complied with this request, unless the period is extended voluntarily by the parties or terminated sooner by the FTC.

 

On July 14, 2016, Alere filed a Form 8-K reporting that it had issued a press release announcing certain preliminary unaudited financial information for the fiscal year ended December 31, 2015 and the three months ended March 31, 2016.  In its press release, Alere also stated that it had identified misstatements under U.S. GAAP regarding the timing of revenue recognition in 2013, 2014 and the first three quarters of 2015, and that it expected to file revised 2013 and 2014 financial statements in its 2015 Form 10-K and revised quarterly financial statements for the first three quarters of 2015 in its 2016 quarterly reports when they are filed.  Alere has not disclosed an expected filing date for its 2015 Form 10-K.  The press release also stated that Alere’s management expects to conclude that one or more material weaknesses exist in Alere’s internal control over financial reporting in the areas of revenue recognition and income taxes and that, as a result, internal control over financial reporting and disclosure controls and procedures were not effective as of December 31, 2015.

 

Under the terms of the agreement, Abbott will pay $56 per common share at a total expected equity value of $5.8 billion. Alere’s net debt, currently $2.6 billion, will be assumed or refinanced by Abbott.  In February 2016, Abbott obtained a commitment for a 364-day senior unsecured bridge term loan facility for an amount not to exceed $9 billion in conjunction with its pending acquisition of Alere.  While Abbott plans to use cash on hand at the time of the acquisition from anticipated long-term borrowings to acquire Alere, the bridge facility will provide back-up financing.

 

On April 27, 2016, Abbott entered into a definitive agreement to acquire St. Jude Medical, Inc. (St. Jude Medical).  With 2015 sales of approximately $5.5 billion, St. Jude Medical is a global medical device manufacturer.  The acquisition, which is expected to significantly advance Abbott’s global cardiovascular device presence and leadership, is subject to the approval of St. Jude Medical shareholders and the satisfaction of customary closing conditions, including applicable regulatory approvals. On July 11, 2016, Abbott and St. Jude Medical received a request for additional information from the United States FTC relating to Abbott’s potential acquisition of St. Jude Medical. The effect of this request, which was issued under the HSR Act, is to extend the waiting period imposed by the HSR Act until 30 days after Abbott and St. Jude Medical have substantially complied with this request, unless the period is extended voluntarily by the parties or terminated sooner by the FTC.

 

Under the terms of the agreement, for each share of stock, St. Jude Medical shareholders will receive $46.75 in cash and 0.8708 of a share of Abbott common stock.  At an Abbott stock price of $42.65, which reflects the closing price on July 20, 2016, this represents a value of approximately $84 per common share at a total expected equity value of approximately $25 billion. St. Jude Medical’s net debt of approximately $5.7 billion will be assumed or refinanced by Abbott.  In April 2016, Abbott obtained a commitment for a 364-day senior unsecured bridge term loan facility for an amount not to exceed $17.2 billion in conjunction with its pending acquisition of

 

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St. Jude Medical.  While Abbott plans to fund the cash portion of this transaction with anticipated medium and long-term borrowings, the bridge facility will provide back-up financing.

 

Note 6 — Goodwill and Intangible Assets

 

The total amount of goodwill reported was $9.752 billion at June 30, 2016 and $9.638 billion at December 31, 2015. In the first six months of 2016, foreign currency translation adjustments increased goodwill by approximately $103 million. There was no purchase price allocation adjustments associated with recent acquisitions made during the six months of 2016. The amount of goodwill related to reportable segments at June 30, 2016 was $3.0 billion for the Established Pharmaceutical Products segment, $286 million for the Nutritional Products segment, $451 million for the Diagnostic Products segment, and $2.9 billion for the Vascular Products segment.  There was no reduction of goodwill relating to impairments.

 

The gross amount of amortizable intangible assets, primarily product rights and technology was $10.9 billion as of June 30, 2016 and $10.8 billion as of December 31, 2015, and accumulated amortization was $6.0 billion as of June 30, 2016 and $5.7 billion as of December 31, 2015.  Foreign currency translation adjustments increased intangible assets by $54 million in the six months of 2016.  Indefinite-lived intangible assets, which relate to in-process research and development acquired in a business combination, were approximately $390 million and $419 million as of June 30, 2016 and December 31, 2015, respectively. In the first six months of 2016, Abbott recorded an impairment of a $43 million in-process research and development project related to a non-reportable segment. Abbott’s estimated annual amortization expense for intangible assets is approximately $580 million in 2016, $560 million in 2017, $520 million in 2018, $490 million in 2019 and $480 million in 2020. Amortizable intangible assets are amortized over 2 to 20 years (weighted average 14 years).

 

Note 7 — Restructuring Plans

 

In 2016, 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 six months of 2016, charges of approximately $13 million were recognized, of which approximately $7 million is recognized as Cost of products sold and approximately $6 million as Selling, general and administrative expense. Additional charges of approximately $2 million were recorded primarily for accelerated depreciation.  The following summarizes the activity for the first six months of 2016 related to these restructuring actions and the status of the related accrual as of June 30, 2016:

 

(in millions)

 

 

 

Accrued balance at December 31, 2015

 

$

100

 

Restructuring charges recorded in 2016

 

13

 

Payments and other adjustments

 

(25

)

Accrued balance at June 30, 2016

 

$

88

 

 

From 2013 to 2015, Abbott management approved various plans to reduce costs and improve efficiencies across various functional areas. In the first six months of 2016, charges of approximately $12 million were recognized as Selling, general and administrative expense. In 2013, Abbott management also approved plans to streamline certain manufacturing operations in order to reduce costs and improve efficiencies in Abbott’s established pharmaceuticals business. In 2012, Abbott management approved plans to streamline various commercial operations in order to reduce costs and improve efficiencies in Abbott’s core diagnostics, established pharmaceuticals and nutritionals businesses. The following summarizes the activity for the first six months of 2016 related to these restructuring actions and the status of the related accrual as of June 30, 2016:

 

(in millions)

 

 

 

Accrued balance at December 31, 2015

 

$

88

 

Restructuring charges recorded in 2016

 

12

 

Payments and other adjustments

 

(46

)

Accrued balance at June 30, 2016

 

$

54

 

 

In 2013 and prior years, Abbott management approved plans to streamline global manufacturing operations, reduce overall costs and improve efficiencies in its worldwide pharmaceutical, vascular and core diagnostics businesses as well as selected domestic and international commercial and research and development operations.  The following summarizes the activity for the first six months of 2016 related to these restructuring actions and the status of the related accrual as of June 30, 2016:

 

(in millions)

 

 

 

Accrued balance at December 31, 2015

 

$

11

 

Payments and other adjustments

 

(4

)

Accrued balance at June 30, 2016

 

$

7

 

 

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Table of Contents

 

Note 8 — Incentive Stock Programs

 

In the first six months of 2016, Abbott granted 7,699,301 stock options, 776,510 restricted stock awards and 7,341,273 restricted stock units under its incentive stock programs.  At June 30, 2016, approximately 56 million shares were reserved for future grants.  Information regarding the number of stock options outstanding and exercisable at June 30, 2016 is as follows:

 

 

 

Outstanding

 

Exercisable

 

Number of shares

 

38,184,610

 

25,540,864

 

Weighted average remaining life (years)

 

5.5

 

3.7

 

Weighted average exercise price

 

$

33.66

 

$

30.05

 

Aggregate intrinsic value (in millions)

 

$

260

 

$

252

 

 

The total unrecognized share-based compensation cost at June 30, 2016 amounted to approximately $280 million which is expected to be recognized over the next three years.

 

Note 9 — Financial Instruments, Derivatives and Fair Value Measures

 

Certain Abbott foreign subsidiaries enter into foreign currency forward exchange contracts to manage exposures to changes in foreign exchange rates for anticipated intercompany purchases by those subsidiaries whose functional currencies are not the U.S. dollar.  These contracts, with gross notional amounts totaling $1.9 billion at June 30, 2016 and $2.4 billion at December 31, 2015 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 June 30, 2016 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 2016 and 2015.

 

Abbott enters into foreign currency forward exchange contracts to manage currency exposures for foreign currency denominated third-party trade payables and receivables, and for intercompany loans and trade accounts payable where the receivable or payable is denominated in a currency other than the functional currency of the entity.  For intercompany loans, the contracts require Abbott to sell or buy foreign currencies, primarily European currencies including the British pound, in exchange for primarily U.S. dollars and other European currencies.  For intercompany and trade payables and receivables, the currency exposures are primarily the U.S. dollar and European currencies.  At June 30, 2016 and December 31, 2015, Abbott held the gross notional amount of $15.1 billion and $14.0 billion, respectively, of such foreign currency forward exchange contracts.

 

Abbott has designated foreign denominated short-term debt as a hedge of the net investment in a foreign subsidiary of approximately $516 million and approximately $439 million as of June 30, 2016 and December 31, 2015, respectively.  Accordingly, changes in the reported value of this debt due to changes in exchange rates are recorded in Accumulated other comprehensive income (loss), net of tax.

 

Abbott is a party to interest rate hedge contracts totaling approximately $4.0 billion at June 30, 2016 and December 31, 2015 to manage its exposure to changes in the fair value of fixed-rate debt.   These contracts are designated as fair value hedges of the variability of the fair value of fixed-rate debt due to changes in the long-term benchmark interest rates.  The effect of the hedge is to change a fixed-rate interest obligation to a variable rate for that portion of the debt.  Abbott records the contracts at fair value and adjusts the carrying amount of the fixed-rate debt by an offsetting amount.  The amount of hedge ineffectiveness was not significant in 2016 and 2015.

 

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The following table summarizes the amounts and location of certain derivative financial instruments as of June 30, 2016 and December 31, 2015:

 

 

 

Fair Value - Assets

 

Fair Value - Liabilities

 

(in millions)

 

June 30,
2016

 

Dec. 31,
2015

 

Balance Sheet Caption

 

June 30,
2016

 

Dec. 31,
2015

 

Balance Sheet Caption

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest rate swaps designated as fair value hedges

 

$

261

 

$

116

 

Deferred income taxes and other assets

 

$

 

$

 

n/a

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Foreign currency forward exchange contracts:

 

 

 

 

 

 

 

 

 

 

 

 

 

Hedging instruments

 

30

 

64

 

Prepaid expenses and other receivables

 

85

 

18

 

Other accrued liabilities

 

Others not designated as hedges

 

110

 

115

 

Prepaid expenses and other receivables

 

76

 

84

 

Other accrued liabilities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

 

 

 

n/a

 

516

 

439

 

Short-term borrowings

 

 

 

$

401

 

$

295

 

 

 

$

677

 

$

541

 

 

 

 

The following table summarizes the activity for foreign currency forward exchange contracts designated as cash flow hedges, debt designated as a hedge of net investment in a foreign subsidiary and 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 six months ended June 30, 2016 and 2015.  The amount of hedge ineffectiveness was not significant in 2016 and 2015 for these hedges.

 

 

 

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

 

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

 

 

 

 

 

Three Months
Ended June 30

 

Six Months
Ended June 30

 

Three Months
Ended June 30

 

Six Months
Ended June 30

 

Income Statement

 

(in millions)

 

2016

 

2015

 

2016

 

2015

 

2016

 

2015

 

2016

 

2015

 

Caption

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Foreign currency forward exchange contracts designated as cash flow hedges

 

$

7

 

$

5

 

$

(51

)

$

48

 

$

23

 

$

30

 

$

54

 

$

47

 

Cost of products sold

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

 

(45

)

11

 

(77

)

14

 

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

 

44

 

(63

)

145

 

(14

)

Interest expense

 

 

Gains of $20 million and $85 million were recognized in the three months ended June 30, 2016 and 2015, respectively, related to foreign currency forward exchange contracts not designated as a hedge. Gains of $18 million and $101 million were recognized in the six months ended June 30, 2016 and 2015, respectively, related to foreign currency forward exchange contracts not designated as a hedge. These amounts are reported in the Condensed Consolidated Statement of Earnings on the Net foreign exchange loss (gain) line.

 

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

 

The carrying values and fair values of certain financial instruments as of June 30, 2016 and December 31, 2015 are shown in the following table. The carrying values of all other financial instruments approximate their estimated fair values.  The counterparties to

 

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Table of Contents

 

financial instruments consist of select major international financial institutions.  Abbott does not expect any losses from nonperformance by these counterparties.

 

 

 

June 30, 2016

 

December 31, 2015

 

(in millions)

 

Carrying
Value

 

Fair
Value

 

Carrying
Value

 

Fair
Value

 

 

 

 

 

 

 

 

 

 

 

Investment Securities:

 

 

 

 

 

 

 

 

 

Equity securities

 

$

3,288

 

$

3,288

 

$

4,014

 

$

4,014

 

Other

 

51

 

54

 

27

 

30

 

Total Long-term Debt

 

(6,020

)

(6,712

)

(5,874

)

(6,337

)

Foreign Currency Forward Exchange Contracts:

 

 

 

 

 

 

 

 

 

Receivable position

 

140

 

140

 

179

 

179

 

(Payable) position

 

(161

)

(161

)

(102

)

(102

)

Interest Rate Hedge Contracts:

 

 

 

 

 

 

 

 

 

Receivable position

 

261

 

261

 

116

 

116

 

 

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

 

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

 

 

 

 

 

Basis of Fair Value Measurement

 

(in millions)

 

Outstanding
Balances

 

Quoted
Prices in
Active
Markets

 

Significant
Other
Observable
Inputs

 

Significant
Unobservable
Inputs

 

June 30, 2016:

 

 

 

 

 

 

 

 

 

Equity securities

 

$

3,030

 

$

3,030

 

$

 

$

 

Interest rate swap derivative financial instruments

 

261

 

 

261

 

 

Foreign currency forward exchange contracts

 

140

 

 

140

 

 

Total Assets

 

$

3,431

 

$

3,030

 

$

401

 

$

 

 

 

 

 

 

 

 

 

 

 

Fair value of hedged long-term debt

 

$

4,280

 

$

 

$

4,280

 

$

 

Foreign currency forward exchange contracts

 

161

 

 

161

 

 

Contingent consideration related to business combinations

 

162

 

 

 

162

 

Total Liabilities

 

$

4,603

 

$

 

$

4,441

 

$

162

 

 

 

 

 

 

 

 

 

 

 

December 31, 2015:

 

 

 

 

 

 

 

 

 

Equity securities

 

$

3,780

 

$

3,780

 

$

 

$

 

Interest rate swap derivative financial instruments

 

116

 

 

116

 

 

Foreign currency forward exchange contracts

 

179

 

 

179

 

 

Total Assets

 

$

4,075

 

$

3,780

 

$

295

 

$

 

 

 

 

 

 

 

 

 

 

 

Fair value of hedged long-term debt

 

$

4,135

 

$

 

$

4,135

 

$

 

Foreign currency forward exchange contracts

 

102

 

 

102

 

 

Contingent consideration related to business combinations

 

173

 

 

 

173

 

Total Liabilities

 

$

4,410

 

$

 

$

4,237

 

$

173

 

 

Equity securities are principally comprised of Mylan N.V. ordinary shares.  The fair value of the Mylan equity securities was determined based on the value of the publicly-traded ordinary shares. 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)

 

June 30, 2016

 

December 31, 2015

 

Fair value of securities in an unrealized loss position

 

$

3,016

 

$

 

Unrealized gross losses

 

589

 

 

 

Available-for-sale securities are periodically assessed for other-than-temporary impairment losses.  The unrealized losses relate to the holding of Mylan N.V. ordinary shares, which have been in an unrealized loss position for less than six months at June 30, 2016.  Factors considered in assessing other-than-temporary impairment losses include the length of time and the extent to which the fair value has been less than cost, the financial condition and near term prospects of the issuer, Abbott’s intent and ability to retain the securities for a period of time sufficient to allow for recovery in fair value, overall market conditions, and industry and company specific factors.  Based on that evaluation and Abbott’s ability and intent to hold these investments for a reasonable period of time sufficient for a forecasted recovery of fair value, Abbott does not consider these securities to be other-than-temporarily impaired at June 30, 2016.

 

Note 10 — Litigation and Environmental Matters

 

Abbott has been identified as a potentially responsible party for investigation and cleanup costs at a number of locations in the United States and Puerto Rico under federal and state remediation laws and is investigating potential contamination at a number of company-owned locations. Abbott has recorded an estimated cleanup cost for each site for which management believes Abbott has a probable loss exposure. No individual site cleanup exposure is expected to exceed $4 million, and the aggregate cleanup exposure is not expected to exceed $10 million.

 

Abbott is involved in various claims and legal proceedings, and Abbott estimates the range of possible loss for its legal proceedings and environmental exposures to be from approximately $35 million to $45 million. The recorded accrual balance at June 30, 2016 for these proceedings and exposures was approximately $40 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 six months ended June 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

 

Six Months

 

Three Months

 

Six Months

 

 

 

Ended June 30

 

Ended June 30

 

Ended June 30

 

Ended June 30

 

(in millions)

 

2016

 

2015

 

2016

 

2015

 

2016

 

2015

 

2016

 

2015

 

Service cost - benefits earned during the period

 

$

67

 

$

68

 

$

134

 

$

150

 

$

6

 

$

6

 

$

13

 

$

15

 

Interest cost on projected benefit obligations

 

73

 

77

 

146

 

156

 

10

 

11

 

22

 

25

 

Expected return on plan assets

 

(143

)

(128

)

(284

)

(257

)

(8

)

(10

)

(17

)

(19

)

Net amortization of:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Actuarial loss, net

 

31

 

42

 

63

 

89

 

3

 

1

 

9

 

10

 

Prior service cost (credit)

 

 

 

 

 

(11

)

(12

)

(22

)

(24

)

Total Cost

 

28

 

59

 

59

 

138

 

 

(4

)

5

 

7

 

Less: Discontinued operations

 

 

 

 

1

 

 

 

 

 

Net cost - continuing operations

 

$

28

 

$

59

 

$

59

 

$

137

 

$

 

$

(4

)

$

5

 

$

7

 

 

Abbott funds its domestic defined benefit plans according to IRS funding limitations.  International pension plans are funded according to similar regulations.  In the first six months of 2016 and 2015, $524 million and $547 million, respectively, were

 

16



Table of Contents

 

contributed to defined benefit plans and $9 million and $24 million, respectively, were contributed to the post-employment medical and dental benefit plans.

 

Note 12 — Taxes on Earnings

 

Taxes on earnings from continuing operations reflect the estimated annual effective rates and include charges for interest and penalties.  In the first six months of 2016, taxes on earnings from continuing operations includes the impact of a net tax benefit of approximately $145 million as a result of the resolution of various tax positions from prior years, partially offset by the unfavorable impact of non-deductible foreign exchange losses related to Venezuela.  Earnings from discontinued operations, net of tax, in the first six months of 2016 reflects the recognition of $266 million of net tax benefits primarily as a result of the resolution of various tax positions related to prior years. The conclusion of these tax matters decreased the gross amount of unrecognized tax benefits by approximately $444 million. In the first six months of 2015, taxes on earnings from continuing operations include a tax cost of $69 million related to the disposal of shares of Mylan stock.  Taxes on earnings from continuing operations in the first six months of 2015 were not affected by any adjustments as the result of the resolution of various tax positions pertaining to prior years. 2015 tax expense related to discontinued operations includes $665 million of tax expense on certain funds earned outside the U.S. in 2015 that were not designated as permanently reinvested overseas. Earnings from discontinued operations, net of tax, in the first six months of 2015 also reflects the recognition of $17 million of net tax benefits primarily as a result of the resolution of various tax positions related to AbbVie’s operations for years prior to the separation. The conclusion of these tax matters decreased the gross amount of unrecognized tax benefits by approximately $35 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 $100 million to $200 million, including cash adjustments, within the next twelve months as a result of concluding various domestic and international tax matters. In the U.S., Abbott’s federal income tax returns through 2012 are settled except for one issue.

 

Note 13 — Segment Information

 

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

 

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

 

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

 

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

 

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

 

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

 

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.

 

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Table of Contents

 

The following segment information has been prepared in accordance with the internal accounting policies of Abbott, as described above, and is not presented in accordance with generally accepted accounting principles applied to the consolidated financial statements.

 

 

 

Net Sales to External Customers

 

Operating Earnings

 

 

 

Three Months

 

Six Months

 

Three Months

 

Six Months

 

 

 

Ended June 30

 

Ended June 30

 

Ended June 30

 

Ended June 30

 

(in millions)

 

2016

 

2015

 

2016

 

2015

 

2016

 

2015

 

2016

 

2015

 

Established Pharmaceutical Products

 

$

980

 

$

977

 

$

1,868

 

$

1,874

 

$

192

 

$

172

 

$

340

 

$

339

 

Nutritional Products

 

1,740

 

1,717

 

3,411

 

3,386

 

368

 

389

 

710

 

739

 

Diagnostic Products

 

1,226

 

1,177

 

2,344

 

2,270

 

288

 

304

 

555

 

580

 

Vascular Products

 

782

 

722

 

1,467

 

1,420

 

290

 

280

 

537

 

564

 

Total Reportable Segments

 

4,728

 

4,593

 

9,090

 

8,950

 

1,138

 

1,145

 

2,142

 

2,222

 

Other

 

605

 

577

 

1,128

 

1,117

 

 

 

 

 

 

 

 

 

Net Sales

 

$

5,333

 

$

5,170

 

$

10,218

 

$

10,067

 

 

 

 

 

 

 

 

 

Corporate functions and benefit plans costs

 

 

 

 

 

 

 

 

 

(94

)

(104

)

(175

)

(221

)

Non-reportable segments

 

 

 

 

 

 

 

 

 

52

 

62

 

50

 

117

 

Net interest expense

 

 

 

 

 

 

 

 

 

(83

)

(17)

 

(108

)

(33

)

Share-based compensation (a)

 

 

 

 

 

 

 

 

 

(62

)

(57

)

(214

)

(205

)

Amortization of intangible assets

 

 

 

 

 

 

 

 

 

(145

)

(151

)

(289

)

(307

)

Other, net (b)

 

 

 

 

 

 

 

 

 

(91

)

108

 

(689

)

66

 

Earnings from continuing operations before taxes

 

 

 

 

 

 

 

 

 

$

715

 

$

986

 

$

717

 

$

1,639

 

 


(a)         Approximately 50 percent of the annual net cost of share-based awards will typically be recognized in the first quarter due to the timing of the granting of share-based awards.

(b)         Other, net for the six months ended June 30, 2016, includes $477 million of foreign currency loss related to operations in Venezuela. Other, net for the three months and six months ended June 30, 2015, includes a gain on the sale of a portion of Abbott’s position in Mylan stock and a decrease in the fair value of contingent consideration related to a business acquisition.

 

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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

 

Abbott’s revenues are derived primarily from the sale of a broad line of health care products under short-term receivable arrangements. Patent protection and licenses, technological and performance features, and inclusion of Abbott’s products under a contract most impact which products are sold; price controls, competition and rebates most impact the net selling prices of products; and foreign currency translation impacts the measurement of net sales and costs. Abbott’s primary products are nutritional products, branded generic pharmaceuticals, diagnostic testing products and vascular products.

 

The following table details sales by reportable segment for the three months and six months ended June 30.  Percent changes are versus the prior year and are based on unrounded numbers.

 

 

 

Net Sales to External Customers

 

(in millions)

 

Three Months
Ended
June 30,
2016

 

Three Months
Ended
June 30,
2015

 

Total
Change

 

Impact of
Foreign
Exchange

 

Total Change
Excl. Foreign
Exchange

 

 

 

 

 

 

 

 

 

 

 

 

 

Established Pharmaceutical Products

 

$

980

 

$

977

 

0.4

%

(9.1

)%

9.5

%

Nutritional Products

 

1,740

 

1,717

 

1.4

 

(2.9

)

4.3

 

Diagnostic Products

 

1,226

 

1,177

 

4.1

 

(1.9

)

6.0

 

Vascular Products

 

782

 

722

 

8.3

 

(0.6

)

8.9

 

Total Reportable Segments

 

4,728

 

4,593

 

2.9

 

(3.6

)

6.5

 

Other

 

605

 

577

 

4.9

 

(0.2

)

5.1

 

Net Sales

 

$

5,333

 

$

5,170

 

3.2

 

(3.2

)

6.4

 

 

 

 

 

 

 

 

 

 

 

 

 

Total U.S.

 

$

1,655

 

$

1,592

 

4.0

 

 

4.0

 

 

 

 

 

 

 

 

 

 

 

 

 

Total International

 

$

3,678

 

$

3,578

 

2.8

 

(4.7

)

7.5

 

 

 

 

Net Sales to External Customers

 

(in millions)

 

Six Months
Ended
June 30,
2016

 

Six Months
Ended
June 30,
2015

 

Total
Change

 

Impact of
Foreign
Exchange

 

Total Change
Excl. Foreign
Exchange

 

 

 

 

 

 

 

 

 

 

 

 

 

Established Pharmaceutical Products

 

$

1,868

 

$

1,874

 

(0.3

)%

(10.5

)%

10.2

%

Nutritional Products

 

3,411

 

3,386

 

0.8

 

(3.5

)

4.3

 

Diagnostic Products

 

2,344

 

2,270

 

3.2

 

(3.2

)

6.4

 

Vascular Products

 

1,467

 

1,420

 

3.3

 

(1.7

)

5.0

 

Total Reportable Segments

 

9,090

 

8,950

 

1.6

 

(4.6

)

6.2

 

Other

 

1,128

 

1,117

 

1.0

 

(1.6

)

2.6

 

Net Sales

 

$

10,218

 

$

10,067

 

1.5

 

(4.3

)

5.8

 

 

 

 

 

 

 

 

 

 

 

 

 

Total U.S.

 

$

3,186

 

$

3,094

 

3.0

 

 

3.0

 

 

 

 

 

 

 

 

 

 

 

 

 

Total International

 

$

7,032

 

$

6,973

 

0.8

 

(6.2

)

7.0

 

 

Note: In order to compute results excluding the impact of exchange rates, current year U.S. dollar sales are multiplied or divided, as appropriate, by the current year average foreign exchange rates and then those amounts are multiplied or divided, as appropriate, by the prior year average foreign exchange rates.

 

Net sales growth in the second quarter and first six months of 2016 was negatively impacted by changes in foreign currency exchange rates.  The relatively stronger U.S. dollar decreased total international sales by 4.7 percent and total sales by 3.2 percent in the second quarter. Excluding the unfavorable impact of foreign exchange, total net sales increased 6.4 percent in the second quarter of 2016, driven by higher revenues across all four reportable segments.  High single digit growth in emerging market sales contributed to the 7.5 percent increase in total international sales excluding the impact of foreign exchange for the second quarter of 2016.

 

19



Table of Contents

 

The table below provides detail by sales category for the six months ended June 30.  Percent changes are versus the prior year and are based on unrounded numbers.

 

(in millions)

 

June 30,
2016

 

June 30,
2015

 

Total
Change

 

Impact of
Foreign
Exchange

 

Total Change
Excl. Foreign
Exchange

 

Established Pharmaceutical Products —

 

 

 

 

 

 

 

 

 

 

 

Key Emerging Markets

 

$

1,388

 

$

1,380

 

0.5

%

(13.5

)%

14.0

%

Other Emerging Markets

 

480

 

494

 

(2.6

)

(2.2

)

(0.4

)

 

 

 

 

 

 

 

 

 

 

 

 

Nutritionals —

 

 

 

 

 

 

 

 

 

 

 

International Pediatric Nutritionals

 

1,111

 

1,144

 

(2.8

)

(5.7

)

2.9

 

U.S. Pediatric Nutritionals

 

828

 

786

 

5.3

 

 

5.3

 

International Adult Nutritionals

 

831

 

828

 

0.3

 

(6.7

)

7.0

 

U.S. Adult Nutritionals

 

641

 

628

 

2.2

 

 

2.2

 

 

 

 

 

 

 

 

 

 

 

 

 

Diagnostics —

 

 

 

 

 

 

 

 

 

 

 

Immunochemistry

 

1,784

 

1,723

 

3.5

 

(3.6

)

7.1