10-Q 1 a17-13353_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, 2017

 

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, a smaller reporting company, or an emerging growth company.  See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

Large Accelerated Filer x

 

Accelerated Filer o

 

 

 

Non-Accelerated Filer o

 

Smaller reporting company o

(Do not check if a smaller reporting company)

 

 

 

 

Emerging growth company o

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.  o

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes o  No x

 

As of June 30, 2017, Abbott Laboratories had 1,737,443,264 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

20

 

 

 

 

Item 3.

 

Quantitative and Qualitative Disclosures about Market Risk

28

 

 

 

 

Item 4.

 

Controls and Procedures

28

 

 

 

 

Part II - Other Information

 

 

 

 

 

Item 1.

 

Legal Proceedings

28

 

 

 

 

Item 2.

 

Unregistered Sales of Equity Securities and Use of Proceeds

29

 

 

 

 

Item 6.

 

Exhibits

29

 

 

 

 

Signature

30

 

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

 

 

 

2017

 

2016

 

2017

 

2016

 

Net sales

 

$

6,637

 

$

5,333

 

$

12,972

 

$

10,218

 

 

 

 

 

 

 

 

 

 

 

Cost of products sold, excluding amortization of intangible assets

 

3,173

 

2,287

 

6,217

 

4,427

 

Amortization of intangible assets

 

392

 

145

 

914

 

289

 

Research and development

 

513

 

348

 

1,060

 

727

 

Selling, general and administrative

 

2,132

 

1,737

 

4,556

 

3,435

 

Total operating cost and expenses

 

6,210

 

4,517

 

12,747

 

8,878

 

 

 

 

 

 

 

 

 

 

 

Operating earnings

 

427

 

816

 

225

 

1,340

 

 

 

 

 

 

 

 

 

 

 

Interest expense

 

214

 

103

 

440

 

161

 

Interest (income)

 

(31

)

(20

)

(53

)

(53

)

Net foreign exchange loss (gain)

 

(12

)

10

 

(28

)

488

 

Other expense (income), net

 

(39

)

8

 

(1,165

)

27

 

Earnings from continuing operations before taxes

 

295

 

715

 

1,031

 

717

 

Taxes on earnings from continuing operations

 

25

 

116

 

375

 

62

 

Earnings from continuing operations

 

270

 

599

 

656

 

655

 

 

 

 

 

 

 

 

 

 

 

Earnings from discontinued operations, net of tax

 

13

 

16

 

46

 

260

 

Gain on sale of discontinued operations, net of tax

 

 

 

 

16

 

Net earnings from discontinued operations, net of tax

 

13

 

16

 

46

 

276

 

Net Earnings

 

$

283

 

$

615

 

$

702

 

$

931

 

 

 

 

 

 

 

 

 

 

 

Basic Earnings Per Common Share —

 

 

 

 

 

 

 

 

 

Continuing operations

 

$

0.15

 

$

0.40

 

$

0.37

 

$

0.44

 

Discontinued operations

 

0.01

 

0.01

 

0.03

 

0.19

 

Net earnings

 

$

0.16

 

$

0.41

 

$

0.40

 

$

0.63

 

 

 

 

 

 

 

 

 

 

 

Diluted Earnings Per Common Share —

 

 

 

 

 

 

 

 

 

Continuing operations

 

$

0.15

 

$

0.40

 

$

0.37

 

$

0.44

 

Discontinued operations

 

0.01

 

0.01

 

0.03

 

0.19

 

Net earnings

 

$

0.16

 

$

0.41

 

$

0.40

 

$

0.63

 

 

 

 

 

 

 

 

 

 

 

Cash Dividends Declared Per Common Share

 

$

0.265

 

$

0.26

 

$

0.53

 

$

0.52

 

 

 

 

 

 

 

 

 

 

 

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

 

1,740,524

 

1,474,504

 

1,734,008

 

1,476,161

 

Dilutive Common Stock Options

 

8,359

 

5,988

 

8,099

 

6,165

 

 

 

 

 

 

 

 

 

 

 

Average Number of Common Shares Outstanding Plus Dilutive Common Stock Options

 

1,748,883

 

1,480,492

 

1,742,107

 

1,482,326

 

 

 

 

 

 

 

 

 

 

 

Outstanding Common Stock Options Having No Dilutive Effect

 

5,258

 

5,673

 

5,258

 

5,673

 

 

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

 

 

 

2017

 

2016

 

2017

 

2016

 

Net Earnings

 

$

283

 

$

615

 

$

702

 

$

931

 

Foreign currency translation gain (loss) adjustments

 

288

 

(104

)

821

 

317

 

Net actuarial gains (losses) and amortization of net actuarial (losses) and prior service (cost) and credits, net of taxes of $11 and $23 in 2017 and $(12) and $(3) in 2016

 

29

 

(47

)

63

 

(29

)

Unrealized gains (losses) on marketable equity securities, net of taxes of $7 and $60 in 2017 and nil in 2016

 

2

 

(213

)

82

 

(756

)

Net (losses) for derivative instruments designated as cash flow hedges and other, net of taxes of $(15) and $(39) in 2017 and $(2) and $(24) in 2016

 

(37

)

(8

)

(102

)

(97

)

Other comprehensive income (loss)

 

282

 

(372

)

864

 

(565

)

Comprehensive Income

 

$

565

 

$

243

 

$

1,566

 

$

366

 

 

 

 

June 30,
2017

 

December 31,
2016

 

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

 

 

 

 

 

 

 

Cumulative foreign currency translation (loss) adjustments

 

$

(3,996

)

$

(4,959

)

Net actuarial (losses) and prior service cost and credits

 

(2,215

)

(2,284

)

Cumulative unrealized gains (losses) on marketable equity securities

 

13

 

(69

)

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

 

(52

)

49

 

Accumulated other comprehensive income (loss)

 

$

(6,250

)

$

(7,263

)

 

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,
2017

 

December 31,
2016

 

Assets

 

 

 

 

 

Current Assets:

 

 

 

 

 

Cash and cash equivalents

 

$

9,675

 

$

18,620

 

Short-term investments

 

160

 

155

 

Trade receivables, less allowances of $265 in 2017 and $250 in 2016

 

4,633

 

3,248

 

Inventories:

 

 

 

 

 

Finished products

 

2,355

 

1,624

 

Work in process

 

450

 

294

 

Materials

 

798

 

516

 

Total inventories

 

3,603

 

2,434

 

Prepaid expenses and other receivables

 

1,912

 

1,806

 

Current assets held for disposition

 

 

513

 

Total Current Assets

 

19,983

 

26,776

 

Investments

 

1,545

 

2,947

 

Property and equipment, at cost

 

14,476

 

12,366

 

Less: accumulated depreciation and amortization

 

7,190

 

6,661

 

Net property and equipment

 

7,286

 

5,705

 

Intangible assets, net of amortization

 

18,653

 

4,539

 

Goodwill

 

22,132

 

7,683

 

Deferred income taxes and other assets

 

1,552

 

2,263

 

Non-current assets held for disposition

 

 

2,753

 

 

 

$

71,151

 

$

52,666

 

Liabilities and Shareholders’ Investment

 

 

 

 

 

Current Liabilities:

 

 

 

 

 

Short-term borrowings

 

$

218

 

$

1,322

 

Trade accounts payable

 

1,667

 

1,178

 

Salaries, wages and commissions

 

905

 

752

 

Other accrued liabilities

 

3,357

 

2,581

 

Dividends payable

 

461

 

391

 

Income taxes payable

 

192

 

188

 

Current portion of long-term debt

 

3

 

3

 

Current liabilities held for disposition

 

 

245

 

Total Current Liabilities

 

6,803

 

6,660

 

Long-term debt

 

23,810

 

20,681

 

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

 

8,750

 

4,549

 

Non-current liabilities held for disposition

 

 

59

 

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: 2017: 1,962,732,172; 2016: 1,707,475,455

 

23,012

 

13,027

 

Common shares held in treasury, at cost — Shares: 2017: 225,288,908; 2016: 234,606,250

 

(10,362

)

(10,791

)

Earnings employed in the business

 

25,202

 

25,565

 

Accumulated other comprehensive income (loss)

 

(6,250

)

(7,263

)

Total Abbott Shareholders’ Investment

 

31,602

 

20,538

 

Noncontrolling Interests in Subsidiaries

 

186

 

179

 

Total Shareholders’ Investment

 

31,788

 

20,717

 

 

 

$

71,151

 

$

52,666

 

 

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

Condensed Consolidated Statement of Cash Flows

(Unaudited)

(dollars in millions)

 

 

 

Six Months Ended June 30

 

 

 

2017

 

2016

 

Cash Flow From (Used in) Operating Activities:

 

 

 

 

 

Net earnings

 

$

702

 

$

931

 

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

 

 

 

 

 

Depreciation

 

508

 

405

 

Amortization of intangible assets

 

914

 

289

 

Share-based compensation

 

263

 

214

 

Impact of currency devaluation

 

 

477

 

Amortization of inventory step-up

 

822

 

 

Gain on sale of businesses

 

(1,151

)

(25

)

Trade receivables

 

(56

)

(150

)

Inventories

 

(127

)

(149

)

Other, net

 

50

 

(1,176

)

Net Cash From Operating Activities

 

1,925

 

816

 

 

 

 

 

 

 

Cash Flow From (Used in) Investing Activities:

 

 

 

 

 

Acquisitions of property and equipment

 

(527

)

(490

)

Acquisitions of businesses and technologies, net of cash acquired

 

(13,027

)

(7

)

Proceeds from business dispositions

 

5,471

 

25

 

Proceeds from the sale of Mylan N.V. shares

 

1,924

 

 

Sales (purchases) of other investment securities, net

 

(28

)

(800

)

Other

 

27

 

28

 

Net Cash (Used in) Investing Activities

 

(6,160

)

(1,244

)

 

 

 

 

 

 

Cash Flow From (Used in) Financing Activities:

 

 

 

 

 

Net (repayments of) short-term debt and other

 

(1,429

)

(285

)

Repayments of long-term debt

 

(2,507

)

(10

)

Payment of debt issuance costs

 

 

(132

)

Payment of contingent consideration

 

(13

)

(25

)

Purchases of common shares

 

(98

)

(520

)

Proceeds from stock options exercised

 

186

 

130

 

Dividends paid

 

(922

)

(769

)

Net Cash (Used in) Financing Activities

 

(4,783

)

(1,611

)

 

 

 

 

 

 

Effect of exchange rate changes on cash and cash equivalents

 

73

 

(384

)

 

 

 

 

 

 

Net Decrease in Cash and Cash Equivalents

 

(8,945

)

(2,423

)

Cash and Cash Equivalents, Beginning of Year

 

18,620

 

5,001

 

Cash and Cash Equivalents, End of Period

 

$

9,675

 

$

2,578

 

 

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, 2017

 

(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, 2016.  The consolidated financial statements include the accounts of the parent company and subsidiaries, after elimination of intercompany transactions.

 

In March 2016, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2016-09, Improvements to Employee Share-Based Payment Accounting. ASU 2016-09 modifies several aspects of the accounting for share-based payment transactions, including the accounting for income taxes and classification on the statement of cash flows. Abbott adopted the standard in the first quarter of 2017 and the following changes were made to the presentation of Abbott’s financial statements:

 

·                  All excess tax benefits or tax deficiencies are now recognized as income tax benefit or expense as applicable. Previously, Abbott recorded the benefits to Shareholders’ Investment. The tax benefit recorded in Abbott’s Condensed Consolidated Statement of Earnings for the second quarter and first six months of 2017 were $25 million and $63 million, respectively. The standard does not permit retrospective presentation of this benefit in prior years.

 

·                  The tax benefit or deficiency is required to be classified as an operating activity in the statement of cash flows. Previously, it was required to be classified within financing activities. Abbott has adopted this standard on a prospective basis and has not revised the classification of the excess tax benefit in the prior year’s Condensed Consolidated Statement of Cash Flows.

 

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.  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.

 

In April 2015, Abbott sold 40.25 million of the 110 million ordinary shares of Mylan N.V.  As a result of this sale, Abbott’s ownership interest in Mylan N.V. decreased to approximately 14%.

 

In March 2017, Abbott sold 44 million ordinary shares of Mylan N.V. and received $1.685 billion in proceeds. In June 2017, Abbott sold an additional 6 million ordinary shares of Mylan N.V. and received $239 million in proceeds.  Abbott recorded an immaterial pre-tax gain in the first six months of 2017, which was recognized in the Other expense (income), net line of the Condensed Consolidated Statement of Earnings.  As a result of these share sales, Abbott’s ownership interest in Mylan N.V. decreased from approximately 14% to approximately 3.7%.

 

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.

 

On January 1, 2013, Abbott completed the separation of AbbVie Inc. (AbbVie), which was formed to hold Abbott’s research-based proprietary pharmaceuticals business. Abbott has retained all liabilities for all U.S. federal and foreign income taxes on income prior to the separation, as well as certain non-income related taxes attributable to AbbVie’s business prior to the separation. AbbVie generally will be liable for all other taxes attributable to its business. Earnings from discontinued operations, net of tax of $46 million and $260 million in the first six months of 2017 and 2016 were driven primarily by the recognition of net tax benefits as a result of the resolution of various tax positions related to AbbVie’s operations for years prior to the separation.

 

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Table of Contents

 

Note 3 — Assets and Liabilities Held for Disposition

 

In September 2016, Abbott announced that it entered into a definitive agreement to sell Abbott Medical Optics (AMO), its vision care business, to Johnson & Johnson for $4.325 billion in cash, subject to customary purchase price adjustments for cash, debt and working capital. The decision to sell AMO reflects Abbott’s proactive shaping of its portfolio in line with its strategic priorities. In February 2017, Abbott completed the sale of AMO to Johnson & Johnson and recognized a pre-tax gain of $1.151 billion, which was reported in the Other expense (income), net line of the Condensed Consolidated Statement of Earnings in the first six months of 2017. Abbott recorded an after-tax gain of $721 million in the first six months of 2017 related to the sale of AMO.

 

The operating results of AMO up to the date of sale continued to be included in Earnings from Continuing Operations as they did not qualify for reporting as discontinued operations. For the three months ended June 30, 2017 and 2016, the AMO earnings before taxes included in Abbott’s consolidated earnings were nil and $13 million, respectively. For the first six months ended June 30, 2017 and 2016, the AMO losses before taxes included in Abbott’s consolidated earnings were $18 million and $44 million, respectively. The following assets and liabilities of this business were reported as held for disposition in Abbott’s Condensed Consolidated Balance Sheet as of December 31, 2016:

 

(in millions)

 

December 31,
2016

 

Trade receivables, net

 

$

222

 

Total inventories

 

240

 

Prepaid expenses and other current assets

 

51

 

Current assets held for disposition

 

513

 

Net property and equipment

 

247

 

Intangible assets, net of amortization

 

529

 

Goodwill

 

1,966

 

Deferred income taxes and other assets

 

11

 

Non-current assets held for disposition

 

2,753

 

Total assets held for disposition

 

$

3,266

 

 

 

 

 

Trade accounts payable

 

$

71

 

Salaries, wages, commissions and other accrued liabilities

 

174

 

Current liabilities held for disposition

 

245

 

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

 

59

 

Total liabilities held for disposition

 

$

304

 

 

Note 4 — 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, 2017 and 2016 were $269 million and $597 million, respectively and for the six months ended June 30, 2017 and 2016 were $653 million and $652 million, respectively.  Net earnings allocated to common shares for the three months ended June 30, 2017 and 2016 were $281 million and $612 million, respectively, and for the six months ended June 30, 2017 and 2016 were $698 million and $927 million, respectively.

 

The Other, net line in Net cash from operating activities in the Condensed Consolidated Statement of Cash Flows for the first six months of 2017 and 2016 includes the effects of contributions to defined benefit plans of $321 million and $524 million, respectively, and to the post-employment medical and dental benefit plans of $11 million and $9 million, respectively. The first six months of 2017 also includes the impact of approximately $430 million of tax expense related to business dispositions, which has not yet been paid, and is taxed at a discrete tax rate.  The first six months of 2016 included 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 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

 

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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 exchange 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, 2017, Abbott’s Venezuelan operations represented approximately 0.01% 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, 2017 and December 31, 2016 are as follows:

 

Long-term Investments

 

June 30,

 

December 31,

 

(in millions)

 

2017

 

2016

 

Equity securities

 

$

1,482

 

$

2,906

 

Other

 

63

 

41

 

Total

 

$

1,545

 

$

2,947

 

 

As discussed in Note 2, in the first six months of 2017, Abbott sold 50 million ordinary shares of Mylan N.V., thereby reducing Abbott’s investment in equity securities by approximately $1.9 billion.

 

Abbott’s equity securities as of June 30, 2017, include approximately $348 million of investments in mutual funds that are held in a rabbi trust and were acquired as part of the St. Jude Medical, Inc. (St. Jude Medical) business acquisition. These investments, which are specifically designated as available for the purpose of paying benefits under a deferred compensation plan, are not available for general corporate purposes and are subject to creditor claims in the event of insolvency.

 

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Note 5 — Changes in Accumulated Other Comprehensive Income (Loss)

 

The changes in accumulated other comprehensive income (loss), net of income taxes, are as follows:

 

 

 

Three Months Ended June 30

 

 

 

 

 

 

 

 

 

Cumulative Gains

 

 

 

 

 

 

 

Cumulative

 

(Losses) on

 

 

 

 

 

Net Actuarial

 

Unrealized Gains

 

Derivative

 

 

 

Cumulative Foreign

 

Losses and Prior

 

(Losses) on 

 

Instruments

 

 

 

Currency Translation

 

Service Costs and

 

Marketable Equity

 

Designated as

 

 

 

Adjustments

 

Credits

 

Securities

 

Cash Flow Hedges

 

(in millions)

 

2017

 

2016

 

2017

 

2016

 

2017

 

2016

 

2017

 

2016

 

Balance at March 31

 

$

(4,284

)

$

(4,408

)

$

(2,244

)

$

(1,940

)

$

11

 

$

(478

)

$

(15

)

$

(25

)

Other comprehensive income (loss) before reclassifications

 

288

 

(104

)

 

(62

)

2

 

(213

)

(38

)

11

 

Amounts reclassified from accumulated other comprehensive income

 

 

 

29

 

15

 

 

 

1

 

(19

)

Net current period comprehensive income (loss)

 

288

 

(104

)

29

 

(47

)

2

 

(213

)

(37

)

(8

)

Balance at June 30

 

$

(3,996

)

$

(4,512

)

$

(2,215

)

$

(1,987

)

$

13

 

$

(691

)

$

(52

)

$

(33

)

 

 

 

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)

 

2017

 

2016

 

2017

 

2016

 

2017

 

2016

 

2017

 

2016

 

Balance at December 31, 2016 and 2015

 

$

(4,959

)

$

(4,829

)

$

(2,284

)

$

(1,958

)

$

(69

)

$

65

 

$

49

 

$

64

 

Impact of business dispositions

 

142

 

 

6

 

 

 

 

1

 

 

Other comprehensive income (loss) before reclassifications

 

821

 

317

 

 

(62

)

183

 

(756

)

(107

)

(47

)

Amounts reclassified from accumulated other comprehensive income

 

 

 

63

 

33

 

(101

)

 

5

 

(50

)

Net current period comprehensive income (loss)

 

821

 

317

 

63

 

(29

)

82

 

(756

)

(102

)

(97

)

Balance at June 30

 

$

(3,996

)

$

(4,512

)

$

(2,215

)

$

(1,987

)

$

13

 

$

(691

)

$

(52

)

$

(33

)

 

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 expense (income), 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 13 for additional details.

 

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Note 6 — Business Acquisitions

 

On January 4, 2017, Abbott completed the acquisition of St. Jude Medical, a global medical device manufacturer, for approximately $23.6 billion, including approximately $13.6 billion in cash and approximately $10 billion in Abbott common shares, which represented approximately 254 million shares of Abbott common stock, based on Abbott’s closing stock price on the acquisition date. As part of the acquisition, approximately $5.9 billion of St. Jude Medical’s debt was assumed, repaid or refinanced by Abbott.  The transaction provides expanded opportunities for future growth and is an important part of the company’s ongoing effort to develop a strong, diverse portfolio of devices, diagnostics, nutritionals and branded generic pharmaceuticals.  The combined company will compete in nearly every area of the cardiovascular market, as well as in the neuromodulation market.

 

Under the terms of the agreement, for each St. Jude Medical common share, St. Jude Medical shareholders received $46.75 in cash and 0.8708 of an Abbott common share.  At an Abbott stock price of $39.36, which reflects the closing price on January 4, 2017, this represented a value of approximately $81 per St. Jude Medical common share and total purchase consideration of $23.6 billion.  The cash portion of the acquisition was funded through a combination of medium and long-term debt issued in November 2016 and a $2.0 billion 120-day senior unsecured bridge term loan facility which was subsequently repaid.

 

The preliminary allocation of the fair value of the St. Jude Medical acquisition is shown in the table below. During the second quarter of 2017, measurement period adjustments to the value of the intangibles resulted in a credit of approximately $70 million to intangible amortization expense to reduce the expense recorded in the first quarter of 2017. The allocation of the fair value of the acquisition will be finalized when the valuation is completed and differences between the preliminary and final allocation could be material.

 

(in billions)

 

 

 

Acquired intangible assets, non-deductible

 

$

15.0

 

Goodwill, non-deductible

 

15.1

 

Acquired net tangible assets

 

3.4

 

Deferred income taxes recorded at acquisition

 

(4.6

)

Net debt

 

(5.3

)

Total preliminary allocation of fair value

 

$

23.6

 

 

The goodwill is primarily attributable to expected synergies from combining operations as well as intangible assets that do not qualify for separate recognition. The acquired tangible assets consist primarily of trade accounts receivable of approximately $1.2 billion, inventory of approximately $1.7 billion, other current assets of $206 million, property and equipment of approximately $1.5 billion, and other long-term assets of $475 million. The acquired tangible liabilities consist of trade accounts payable and other current liabilities of approximately $1.0 billion and other non-current liabilities of approximately $655 million.

 

If the acquisition of St. Jude Medical had occurred at the beginning of 2016, unaudited pro forma consolidated net sales would have been approximately $13.2 billion and unaudited pro forma consolidated net loss would have been approximately $165 million for the first six months of 2016, which includes the amortization of approximately $820 million of inventory step-up and $670 million of intangibles related to St. Jude Medical.  For the second quarter of 2016, unaudited pro forma consolidated net sales would have been approximately $6.9 billion and unaudited pro forma consolidated net earnings would have been approximately $250 million, which includes the amortization of approximately $430 million of inventory step-up and $340 million of intangibles related to St. Jude Medical. The unaudited pro forma information is not necessarily indicative of the consolidated results of operations that would have been realized had the St. Jude Medical acquisition been completed as of the beginning of 2016, nor is it meant to be indicative of future results of operations that the combined entity will experience.

 

In the first six months of 2017, consolidated Abbott results include $2.9 billion of sales and a pre-tax loss of approximately $1.0 billion related to the St. Jude Medical acquisition, including approximately $670 million of intangible amortization and $820 million of inventory step-up amortization. It excludes acquisition, integration and restructuring-related costs.

 

In 2016, Abbott and St. Jude Medical agreed to sell certain businesses to Terumo Corporation for approximately $1.12 billion.  The sale included the St. Jude Medical Angio-Seal™ and Femoseal™ vascular closure and Abbott’s Vado® Steerable Sheath businesses. The sale closed on January 20, 2017 and no gain or loss was recorded in the Condensed Consolidated Statement of Earnings.

 

On January 30, 2016, Abbott entered into a definitive agreement to acquire Alere Inc. (Alere), a diagnostic device and service provider, for $56.00 per common share in cash.  On April 13, 2017, Abbott and Alere amended the terms of the agreement to reduce the purchase price to $51.00 per common share.  The amended terms reduce the originally expected equity value by approximately $500 million to a new expected equity value of approximately $5.3 billion, which includes both common and preferred shares.  On

 

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July 7, 2017, the Alere shareholders approved the acquisition. The acquisition is expected to close by the end of the third quarter of 2017, subject to the satisfaction of customary closing conditions, including applicable regulatory approvals.  Under the amended terms of the acquisition agreement, the date by which necessary regulatory approvals must be received has been extended to September 30, 2017.  The companies also agreed to dismiss their respective lawsuits.  The acquisition is expected to significantly expand Abbott’s global diagnostics presence and leadership.  Abbott expects to utilize a combination of cash on hand and debt to fund the acquisition.  Alere’s net debt, which totaled $2.3 billion at March 31, 2017, will be assumed, refinanced or repaid by Abbott.

 

On July 15, 2017, Alere entered into an agreement to sell its Triage MeterPro cardiovascular and toxicology business and the assets and liabilities related to its B-type Natriuretic Peptide assay business run on Beckman Coulter analyzers to Quidel Corporation (Quidel).  The transactions with Quidel reflect a total purchase price of approximately $400 million and contingent consideration with a maximum value of $40 million. On July 21, 2017, Alere entered into an agreement with Siemens Diagnostics Holding II B.V. to sell its subsidiary, Epocal Inc., for approximately $200 million. These transactions are subject to the successful completion of Abbott’s acquisition of Alere and antitrust regulatory approvals.  Alere is divesting these businesses in connection with the review by the Federal Trade Commission and the European Commission of Abbott’s agreement to acquire Alere.

 

On July 17, 2017, Abbott commenced a tender offer to purchase for cash the 1.77 million outstanding shares of Alere’s Series B Convertible Perpetual Preferred Stock at a price of $402 per share, plus accrued but unpaid dividends to, but not including, the settlement date of the tender offer. This tender offer is subject to the satisfaction of certain conditions, including Abbott’s acquisition of Alere and upon there being validly tendered (and not properly withdrawn) at the expiration date of the tender offer that number of shares of Preferred Stock that equals at least a majority of the Preferred Stock issued and outstanding at the expiration of the tender offer.

 

On July 31, 2017, Abbott entered into a term loan agreement whereby Abbott can borrow up to $2.8 billion on an unsecured basis for the acquisition of Alere.  Funding of the 5-year loan is subject to the satisfaction of certain conditions related to the consummation of the Alere acquisition.  Borrowings under the term loan will bear interest, at Abbott’s option, based on either a base rate or a Eurodollar rate, plus an applicable margin based on Abbott’s credit ratings.

 

Note 7 — Goodwill and Intangible Assets

 

The total amount of goodwill reported was $22.132 billion at June 30, 2017 and $7.683 billion at December 31, 2016. Goodwill increased by $15.1 billion during the first six months of 2017 due to the completion of the St. Jude Medical acquisition, partially offset by a decrease of $1.1 billion due to the sale of certain businesses to Terumo Corporation. Foreign currency translation adjustments increased goodwill by approximately $421 million in the first six months of 2017. The amount reported at December 31, 2016 excludes goodwill reported in non-current assets held for disposition. As part of the sale of AMO in the first six months of 2017, approximately $2.0 billion of goodwill was included as part of the net assets sold. The amount of goodwill related to reportable segments at June 30, 2017 was $3.1 billion for the Established Pharmaceutical Products segment, $286 million for the Nutritional Products segment, $417 million for the Diagnostic Products segment, and $17.3 billion for the Cardiovascular and Neuromodulation Products segment.  The Cardiovascular and Neuromodulation Products segment includes the amount previously reported under Abbott’s Vascular Products segment as well as the goodwill related to the St. Jude Medical acquisition. There was no significant reduction of goodwill relating to impairments.

 

The gross amount of amortizable intangible assets, primarily product rights and technology was $21.7 billion as of June 30, 2017 and $10.4 billion as of December 31, 2016, and accumulated amortization was $7.0 billion as of June 30, 2017 and $6.2 billion as of December 31, 2016. The gross amount of amortizable intangible assets increased by $11.3 billion during the first six months of 2017 due to the completion of the St. Jude Medical acquisition.  Foreign currency translation adjustments increased intangible assets by $128 million during the first six months of 2017.  The December 31, 2016 amounts exclude net intangible assets reported in non-current assets held for disposition. As part of the sale of AMO in the first six months of 2017, approximately $529 million of net intangible assets were included in the net assets sold.

 

Indefinite-lived intangible assets, which relate to in-process research and development acquired in a business combination, were approximately $4.0 billion and $349 million as of June 30, 2017 and December 31, 2016, respectively. Indefinite-lived intangible assets increased by $3.7 billion due to the completion of the St. Jude Medical acquisition. 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 $1.9 billion in 2017, $2.1 billion in 2018, $2.0 billion in 2019, $1.8 billion in 2020 and $1.7 billion in 2021. Amortizable intangible assets are amortized over 2 to 20 years (weighted average 11 years).

 

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Note 8 — Restructuring Plans

 

In 2017, Abbott management approved restructuring plans as part of the integration of the acquisition of St. Jude Medical into the cardiovascular and neuromodulation segment to leverage economies of scale and reduce costs. In the first six months of 2017, charges of approximately $144 million, including one-time employee termination benefits were recorded as Selling, general and administrative expense.  Abbott also assumed restructuring liabilities of approximately $20 million as part of the St Jude Medical acquisition.  The following summarizes the activity for the first six months of 2017 related to these actions and the status of the related accrual as of June 30, 2017:

 

(in millions)

 

 

 

Liabilities assumed as part of business acquisition

 

$

20

 

Restructuring charges recorded in 2017

 

144

 

Payments and other adjustments

 

(70

)

Accrued balance at June 30, 2017

 

$

94

 

 

From 2014 to 2017, Abbott management approved plans to streamline operations in order to reduce costs and improve efficiencies in various Abbott businesses including the nutritional and established pharmaceuticals businesses. In the first six months of 2017, charges of approximately $17 million were recognized, of which approximately $4 million is recorded in Cost of products sold, approximately $7 million is recorded in Research and development and approximately $6 million as Selling, general and administrative expense. The following summarizes the activity for the first six months of 2017 related to these restructuring actions and the status of the related accrual as of June 30, 2017:

 

(in millions)

 

 

 

Accrued balance at December 31, 2016

 

$

66

 

Restructuring charges recorded in 2017

 

17

 

Payments and other adjustments

 

(22

)

Accrued balance at June 30, 2017

 

$

61

 

 

Note 9 — Incentive Stock Programs

 

In connection with the completion of the St. Jude Medical acquisition in the first quarter of 2017, unvested St. Jude Medical stock options and restricted stock units were assumed by Abbott and converted into Abbott options and restricted stock units (as applicable) of substantially equivalent value, in accordance with the merger agreement. The number of shares underlying the converted options was 7,364,571 at a weighted average exercise price of $30.50.  The number of restricted stock units converted was 2,324,500 at a weighted average grant date fair value of $37.69.

 

In the first six months of 2017, Abbott granted 4,370,403 stock options, 546,383 restricted stock awards and 6,865,354 restricted stock units under its incentive stock programs.  At June 30, 2017, approximately 170 million shares were reserved for future grants. This reserve reflects the shares authorized by Abbott’s shareholders in April 2017.  Information regarding the number of options outstanding and exercisable at June 30, 2017 is as follows:

 

 

 

Outstanding

 

Exercisable

 

Number of shares

 

40,577,408

 

23,873,390

 

Weighted average remaining life (years)

 

6.0

 

4.7

 

Weighted average exercise price

 

$

35.72

 

$

33.92

 

Aggregate intrinsic value (in millions)

 

$

523

 

$

351

 

 

The total unrecognized share-based compensation cost at June 30, 2017 amounted to approximately $393 million which is expected to be recognized over the next three years.

 

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Table of Contents

 

Note 10 — Debt and Lines of Credit

 

In the first six months of 2017, as part of the acquisition of St. Jude Medical, Abbott’s long-term debt increased due to the assumption of outstanding debt previously issued by St. Jude Medical.  Abbott exchanged certain St. Jude Medical debt obligations with an aggregate principal amount of approximately $2.9 billion for debt issued by Abbott which consists of:

 

 

 

Principal Amount

2.00% Senior Notes due 2018

 

$473.8 million

2.80% Senior Notes due 2020

 

$483.7 million

3.25% Senior Notes due 2023

 

$818.4 million

3.875% Senior Notes due 2025

 

$490.7 million

4.75% Senior Notes due 2043

 

$639.1 million

 

Following this exchange, approximately $194.2 million of existing St. Jude Medical notes remain outstanding across the five series of existing notes which have the same coupons and maturities as those listed above. There were no significant costs associated with the exchange of debt.

 

In addition, during the first six months of 2017, Abbott assumed and subsequently repaid the following St. Jude Medical debt obligations:

 

Term loan due 2020

 

$2.3 billion

Yen-denominated notes due 2017 and 2020

 

$179 million

Yen-denominated credit facilities

 

$55 million

Commercial paper borrowings

 

$220 million

 

On January 4, 2017, as part of funding the cash portion of the St. Jude Medical acquisition, Abbott borrowed $2.0 billion under a 120-day senior unsecured bridge term loan facility.  This facility was repaid during the first six months of 2017.

 

During the first six months of 2017, Abbott issued 364-day yen-denominated debt, of which $195 million was outstanding at June 30, 2017. Abbott also paid off a $479 million yen-denominated short-term debt.

 

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. This commitment, which was automatically extended for up to 90 days on January 29, 2017, expired on April 30, 2017 and was not renewed since Abbott does not need this bridge facility to finance the Alere acquisition. The fees associated with the bridge facilities were recognized in interest expense.

 

On July 31, 2017, Abbott entered into a term loan agreement whereby Abbott can borrow up to $2.8 billion on an unsecured basis for the acquisition of Alere.  Funding of the 5-year loan is subject to the satisfaction of certain conditions related to the consummation of the Alere acquisition.  Borrowings under the term loan will bear interest, at Abbott’s option, based on either a base rate or a Eurodollar rate, plus an applicable margin based on Abbott’s credit ratings.

 

Note 11 — Financial Instruments, Derivatives and Fair Value Measures

 

Certain Abbott foreign subsidiaries enter into foreign currency forward exchange contracts to manage exposures to changes in foreign exchange rates for anticipated intercompany purchases by those subsidiaries whose functional currencies are not the U.S. dollar.  These contracts, with gross notional amounts totaling $2.8 billion at June 30, 2017 and $2.6 billion at December 31, 2016 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, 2017 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 2017 and 2016.

 

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, 2017 and December 31, 2016, Abbott held the gross notional amount of $14.3 billion and $14.9 billion, respectively, of such foreign currency forward exchange contracts.

 

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Table of Contents

 

In March 2017, Abbott repaid its $479 million foreign denominated short-term debt which was designated as a hedge of the net investment in a foreign subsidiary. At December 31, 2016, the value of this short-term debt was $454 million and changes in the fair value of the debt up through the date of repayment due to changes in exchange rates were 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, 2017 and $5.5 billion at December 31, 2016 to manage its exposure to changes in the fair value of fixed-rate debt. In the second quarter of 2017, Abbott unwound approximately $1.5 billion in interest rate swaps relating to the 2.00% Note due in 2020 and the 2.55% Note due in 2022. The proceeds received were not significant.  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 2017 and 2016.

 

The following table summarizes the amounts and location of certain derivative financial instruments as of June 30, 2017 and December 31, 2016:

 

 

 

Fair Value - Assets

 

Fair Value - Liabilities

 

(in millions)

 

June 30,
2017

 

Dec. 31,
2016

 

Balance Sheet Caption

 

June 30,
2017

 

Dec. 31,
2016

 

Balance Sheet Caption

 

Interest rate swaps designated as fair value hedges

 

$

7

 

$

8

 

Deferred income taxes and other assets

 

$

59

 

$

74

 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Foreign currency forward exchange contracts:

 

 

 

 

 

 

 

 

 

 

 

 

 

Hedging instruments

 

29

 

99

 

Prepaid expenses and other receivables

 

85

 

15

 

Other accrued liabilities

 

Others not designated as hedges

 

176

 

177

 

Prepaid expenses and other receivables

 

112

 

67

 

Other accrued liabilities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

 

 

 

n/a

 

 

454

 

Short-term borrowings

 

 

 

$

212

 

$

284

 

 

 

$

256

 

$

610

 

 

 

 

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, 2017 and 2016.  The amount of hedge ineffectiveness was not significant in 2017 and 2016 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)

 

2017

 

2016

 

2017

 

2016

 

2017

 

2016

 

2017

 

2016

 

Caption

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Foreign currency forward exchange contracts designated as cash flow hedges

 

$

(54

)

$

7

 

$

(145

)

$

(51

)

$

(2

)

$

23

 

$

(7

)

$

54

 

Cost of products sold

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

 

 

(45

)

(25

)

(77

)

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

 

40

 

44

 

14

 

145

 

Interest expense

 

 

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Table of Contents

 

Losses of $51 million and gains of $20 million were recognized in the three months ended June 30, 2017 and 2016, respectively, related to foreign currency forward exchange contracts not designated as a hedge. Losses of $42 million and gains of $18 million were recognized in the six months ended June 30, 2017 and 2016, 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, 2017 and December 31, 2016 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.

 

 

 

June 30, 2017

 

December 31, 2016

 

(in millions)

 

Carrying
Value

 

Fair
Value

 

Carrying
Value

 

Fair
Value

 

 

 

 

 

 

 

 

 

 

 

Investment Securities:

 

 

 

 

 

 

 

 

 

Equity securities

 

$

1,482

 

$

1,482

 

$

2,906

 

$

2,906

 

Other

 

63

 

63

 

41

 

42

 

Total Long-term Debt

 

(23,813

)

(25,007

)

(20,684

)

(21,147

)

Foreign Currency Forward Exchange Contracts:

 

 

 

 

 

 

 

 

 

Receivable position

 

205

 

205

 

276

 

276

 

(Payable) position

 

(197

)

(197

)

(82

)

(82

)

Interest Rate Hedge Contracts:

 

 

 

 

 

 

 

 

 

Receivable position

 

7

 

7

 

8

 

8

 

(Payable) position

 

(59

)

(59

)

(74

)

(74

)

 

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

 

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Table of Contents

 

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, 2017:

 

 

 

 

 

 

 

 

 

Equity securities

 

$

1,183

 

$

1,183

 

$

 

$

 

Interest rate swap derivative financial instruments

 

7

 

 

7

 

 

Foreign currency forward exchange contracts

 

205

 

 

205

 

 

Total Assets

 

$

1,395

 

$

1,183

 

$

212

 

$

 

 

 

 

 

 

 

 

 

 

 

Fair value of hedged long-term debt

 

$

3,938

 

$

 

$

3,938

 

$

 

Foreign currency forward exchange contracts

 

197

 

 

197

 

 

Interest rate swap derivative financial instruments

 

59

 

 

59

 

 

Contingent consideration related to business combinations

 

146

 

 

 

146

 

Total Liabilities

 

$

4,340

 

$

 

$

4,194

 

$

146

 

 

 

 

 

 

 

 

 

 

 

December 31, 2016:

 

 

 

 

 

 

 

 

 

Equity securities

 

$

2,676

 

$

2,676

 

$

 

$

 

Interest rate swap derivative financial instruments

 

8

 

 

8

 

 

Foreign currency forward exchange contracts

 

276

 

 

276

 

 

Total Assets

 

$

2,960

 

$

2,676

 

$

284

 

$

 

 

 

 

 

 

 

 

 

 

 

Fair value of hedged long-term debt

 

$

5,413

 

$

 

$

5,413

 

$

 

Interest rate swap derivative financial instruments

 

74

 

 

74

 

 

Foreign currency forward exchange contracts

 

82

 

 

82

 

 

Contingent consideration related to business combinations

 

136

 

 

 

136

 

Total Liabilities

 

$

5,705

 

$

 

$

5,569

 

$

136

 

 

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. In the first six months of 2017, Abbott sold 50 million ordinary shares of Mylan N.V which had a value of $1.9 billion.  As a result of this sale, Abbott’s ownership interest in Mylan N.V. decreased from approximately 14% to approximately 3.7%.  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.  In the first six months of 2017, the increase in the fair value of the contingent consideration was due to the assumption of St. Jude Medical’s contingent consideration obligations.

 

Note 12 — 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 $40 million to $45 million. The recorded accrual balance at June 30, 2017 for these proceedings and exposures was approximately $45 million. This accrual represents management’s best estimate of probable loss, as defined by FASB ASC No. 450, “Contingencies.” Within the next year, legal proceedings may occur that may result in a change in the estimated loss accrued by Abbott. While it is not feasible to predict the outcome of all such proceedings and exposures with certainty, management believes that their ultimate disposition should not have a material adverse effect on Abbott’s financial position, cash flows, or results of operations.

 

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Note 13 — 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)

 

2017

 

2016

 

2017

 

2016

 

2017

 

2016

 

2017

 

2016

 

Service cost - benefits earned during the period

 

$

70

 

$

67

 

$

142

 

$

134

 

$

6

 

$

6

 

$

13

 

$

13

 

Interest cost on projected benefit obligations

 

71

 

73

 

143

 

146

 

11

 

10

 

22

 

22

 

Expected return on plan assets

 

(153

)

(143

)

(305

)

(284

)

(8

)

(8

)

(16

)

(17

)

Net amortization of:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Actuarial loss, net

 

40

 

31

 

82

 

63

 

6

 

3

 

12

 

9

 

Prior service cost (credit)

 

 

 

 

 

(12

)

(11

)

(23

)

(22

)

Net cost - continuing operations

 

$

28

 

$

28

 

$

62

 

$

59

 

$

3

 

$

 

$

8

 

$

5

 

 

In the first six months of 2017, Abbott recognized a $10 million curtailment gain related to the disposition of AMO.

 

Abbott funds its domestic defined benefit plans according to IRS funding limitations.  International pension plans are funded according to similar regulations.  In the first six months of 2017 and 2016, $321 million and $524 million, respectively, were contributed to defined benefit plans and $11 million and $9 million, respectively, were contributed to the post-employment medical and dental benefit plans.

 

Note 14 — 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 2017, taxes on earnings from continuing operations include $430 million of tax expense related to the gain on the sale of the AMO business, which is taxed at a discrete tax rate.  Earnings from discontinued operations, net of tax, of $46 million for the first six months of 2017 primarily reflects the recognition of net tax benefits as a result of the resolution of various tax positions related to prior years.  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.

 

Tax authorities in various jurisdictions regularly review Abbott’s income tax filings.  Abbott believes that it is reasonably possible that the recorded amount of gross unrecognized tax benefits may decrease between $200 million and $350 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 are settled through 2013 and St. Jude Medical’s federal income tax returns are settled through 2013 except for one item.

 

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Table of Contents

 

Note 15 — 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.  On January 4, 2017, Abbott completed the acquisition of St. Jude Medical. Beginning with the first quarter of 2017, Abbott’s cardiovascular and neuromodulation business includes the results of its historical Vascular Products segment and the results of the businesses acquired from St. Jude Medical from the date of acquisition.

 

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.

 

Cardiovascular and Neuromodulation Products — Worldwide sales of rhythm management, electrophysiology, heart failure, vascular, structural heart and neuromodulation products.

 

Non-reportable segments include AMO through the date of sale and Diabetes Care.

 

Abbott’s underlying accounting records are maintained on a legal entity basis for government and public reporting requirements.  Segment disclosures are on a performance basis consistent with internal management reporting.  Intersegment transfers of inventory are recorded at standard cost and are not a measure of segment operating earnings.  The cost of some corporate functions and the cost of certain employee benefits are charged to segments at predetermined rates that approximate cost.  Remaining costs, if any, are not allocated to segments.  In addition, intangible asset amortization is not allocated to operating segments, and intangible assets and goodwill are not included in the measure of each segment’s assets.  As a result of the acquisition of St. Jude Medical, the total assets of the Cardiovascular and Neuromodulation segment increased from $1.425 billion at December 31, 2016 to $5.250 billion at June 30, 2017.  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)

 

2017

 

2016

 

2017

 

2016

 

2017

 

2016

 

2017

 

2016

 

Established Pharmaceutical Products

 

$

1,021

 

$

980

 

$

1,971

 

$

1,868

 

$

180

 

$

192

 

$

320

 

$

340

 

Nutritional Products

 

1,731

 

1,740

 

3,373

 

3,411

 

392

 

368

 

743

 

710

 

Diagnostic Products

 

1,273

 

1,226

 

2,431

 

2,344

 

338

 

288

 

622

 

555

 

Cardiovascular and Neuromodulation Products (a)

 

2,260

 

782

 

4,363

 

1,467

 

689

 

290

 

1,308

 

537

 

Total Reportable Segments

 

6,285

 

4,728

 

12,138

 

9,090

 

1,599

 

1,138

 

2,993

 

2,142

 

Other

 

352

 

605

 

834

 

1,128

 

 

 

 

 

 

 

 

 

Net Sales

 

$

6,637

 

$

5,333

 

$

12,972

 

$

10,218

 

 

 

 

 

 

 

 

 

Corporate functions and benefit plans costs

 

 

 

 

 

 

 

 

 

(104

)

(94

)

(197

)

(175

)

Non-reportable segments

 

 

 

 

 

 

 

 

 

74

 

52

 

120

 

50

 

Net interest expense

 

 

 

 

 

 

 

 

 

(183

)

(83

)

(387

)

(108

)

Share-based compensation (b)

 

 

 

 

 

 

 

 

 

(92

)

(62

)

(263

)

(214

)

Amortization of intangible assets

 

 

 

 

 

 

 

 

 

(392

)

(145

)

(914

)

(289

)

Other, net (c)

 

 

 

 

 

 

 

 

 

(607

)

(91

)

(321

)

(689

)

Earnings from continuing operations before taxes

 

 

 

 

 

 

 

 

 

$

295

 

$

715

 

$

1,031

 

$

717

 

 


(a)         Operating earnings for the first six months of 2017 include certain costs previously reflected in corporate functions during the first three months of 2017.

 

(b)         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.

 

(c)          Other, net for the six months ended June 30, 2017, includes the gain on the sale of the AMO business. Other, net for the three and six months ended June 30, 2017, includes inventory step-up amortization, restructuring charges and integration costs associated with the acquisition of St. Jude Medical.  Other, net for the six months ended June 30, 2016, includes the $477 million foreign currency loss related to operations in Venezuela and the $43 million impairment of an in-process research and development project related to a non-reportable segment.

 

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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 cardiovascular and neuromodulation 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,
2017

 

Three Months
Ended
June 30,
2016

 

Total
Change

 

Impact of
Foreign
Exchange

 

Total Change
Excl. Foreign
Exchange

 

 

 

 

 

 

 

 

 

 

 

 

 

Established Pharmaceutical Products

 

$

1,021

 

$

980

 

4.1

%

0.6

%

3.5

%

Nutritional Products

 

1,731

 

1,740

 

(0.6

)

(1.1

)

0.5

 

Diagnostic Products

 

1,273

 

1,226

 

3.8

 

(1.6

)

5.4

 

Cardiovascular and Neuromodulation Products

 

2,260

 

782

 

189.0

 

(1.1

)

190.1

 

Total Reportable Segments

 

6,285

 

4,728

 

32.9

 

(0.8

)

33.7

 

Other

 

352

 

605

 

(41.8

)

(1.3

)

(40.5

)

Net Sales

 

$

6,637

 

$

5,333

 

24.4

 

(0.9

)

25.3

 

 

 

 

 

 

 

 

 

 

 

 

 

Total U.S.

 

$

2,360

 

$

1,655

 

42.5

 

 

42.5

 

 

 

 

 

 

 

 

 

 

 

 

 

Total International

 

$

4,277

 

$

3,678

 

16.3

 

(1.3

)

17.6

 

 

 

 

Net Sales to External Customers

 

(in millions)

 

Six Months
Ended
June 30,
2017

 

Six Months
Ended
June 30,
2016

 

Total
Change

 

Impact of
Foreign
Exchange

 

Total Change
Excl. Foreign
Exchange

 

 

 

 

 

 

 

 

 

 

 

 

 

Established Pharmaceutical Products

 

$

1,971

 

$

1,868

 

5.5

%

1.0

%

4.5

%

Nutritional Products

 

3,373

 

3,411

 

(1.1

)

(0.8

)

(0.3

)

Diagnostic Products

 

2,431

 

2,344

 

3.7

 

(1.4

)

5.1

 

Cardiovascular and Neuromodulation Products

 

4,363

 

1,467

 

197.4

 

(1.1

)

198.5

 

Total Reportable Segments

 

12,138

 

9,090

 

33.5

 

(0.7

)

34.2

 

Other

 

834

 

1,128

 

(26.0

)

(1.3

)

(24.7

)

Net Sales

 

$

12,972

 

$

10,218

 

27.0

 

(0.7

)

27.7

 

 

 

 

 

 

 

 

 

 

 

 

 

Total U.S.

 

$

4,684

 

$

3,186

 

47.0

 

 

47.0

 

 

 

 

 

 

 

 

 

 

 

 

 

Total International

 

$

8,288

 

$

7,032

 

17.9

 

(1.0

)

18.9

 

 

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.

 

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Table of Contents

 

Net sales growth in the second quarter and first six months of 2017 was driven by the acquisition of St. Jude Medical, Inc. (St. Jude Medical) which was completed on January 4, 2017 as well as growth in the Established Pharmaceutical Products and Diagnostic Products segments excluding the impact of foreign exchange. Beginning in the first quarter of 2017, Abbott’s cardiovascular and neuromodulation business included the results of its historical Vascular Products segment and the results of the businesses acquired from St. Jude Medical from the date of acquisition. The decrease in the Other category for the second quarter and first six months of 2017 reflects the sale of the Abbott Medical Optics (AMO) segment to Johnson & Johnson, partially offset by double-digit growth in Abbott’s Diabetes Care business. The AMO segment was included in Abbott’s results as a non-reportable segment up to February 27, 2017.  Excluding the St. Jude Medical acquisition, AMO results and the impact of foreign exchange, total net sales increased 2.7 percent, U.S. sales increased 1.1 percent and international sales increased 3.4 percent in the second quarter of 2017. Excluding the St. Jude Medical acquisition, AMO results and the impact of foreign exchange, total net sales increased 3.0 percent, U.S. sales increased 3.0 percent and international sales increased 3.1 percent in the first six months of 2017.

 

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,
2017

 

June 30,
2016

 

Total
Change

 

Impact of
Foreign
Exchange

 

Total Change
Excl. Foreign
Exchange

 

Established Pharmaceutical Products —

 

 

 

 

 

 

 

 

 

 

 

Key Emerging Markets

 

$

1,528

 

$

1,388

 

10.1

%

1.9

%

8.2

%

Other Emerging Markets

 

443

 

480

 

(7.8

)

(1.7

)

(6.1

)

 

 

 

 

 

 

 

 

 

 

 

 

Nutritionals —

 

 

 

 

 

 

 

 

 

 

 

International Pediatric Nutritionals

 

1,023

 

1,111

 

(8.0

)

(1.6

)

(6.4

)

U.S. Pediatric Nutritionals

 

891

 

828

 

7.7

 

 

7.7

 

International Adult Nutritionals

 

847

 

831

 

1.9

 

(1.4

)

3.3

 

U.S. Adult Nutritionals

 

612

 

641

 

(4.5

)

 

(4.5

)

 

 

 

 

 

 

 

 

 

 

 

 

Diagnostics —

 

 

 

 

 

 

 

 

 

 

 

Core Laboratory

 

1,931

 

1,863

 

3.6

 

(1.7

)

5.3

 

Molecular

 

226

 

227

 

(0.5

)

(0.2

)

(0.3

)

Point of Care

 

274

 

254

 

8.0

 

(0.2

)

8.2

 

 

 

 

 

 

 

 

 

 

 

 

 

Cardiovascular and Neuromodulation —

 

 

 

 

 

 

 

 

 

 

 

Rhythm Management

 

1,063

 

 

n/m

 

n/m

 

n/m

 

Electrophysiology

 

659

 

7

 

n/m

 

n/m

 

n/m

 

Heart Failure

 

301

 

 

n/m

 

n/m

 

n/m

 

Vascular

 

1,434

 

1,287

 

11.4

 

(1.0

)

12.4

 

Structural Heart

 

524

 

173

 

203.2

 

(1.9

)

205.1

 

Neuromodulation

 

382

 

 

n/m

 

n/m

 

n/m

 

 

Key Emerging Markets for the Established Pharmaceutical Products business include India, Russia, Brazil and China, along with several other markets that represent the most attractive long-term growth opportunities for Abbott’s branded generics product portfolio.  Excluding the effect of foreign exchange, sales in the Key Emerging Markets increased 8.2 percent compared to the first six months of 2016. Strong growth in Russia, China, and several countries across Latin America was partially offset by the impact associated with implementation of a new Goods and Services Tax (GST) system in India during the second quarter of 2017. Excluding the transitory effect of GST on purchasing patterns in India, sales in Key Emerging Markets would have grown double-digits in the first half of 2017. The 6.1 percent decrease in Other Emerging Markets in the first six months of 2017 primarily reflects the unfavorable impact of Venezuelan operations.  Excluding Venezuela and the effect of foreign exchange, sales in Other Emerging Markets increased 4.1 percent versus the first six months of 2016.

 

Excluding the effect of foreign exchange, International Pediatric Nutritional sales decreased 6.4 percent in the first half of 2017.  Challenging conditions in the Chinese infant formula market continued to impact international performance.  In the U.S., above-market Pediatric sales growth of 7.7 percent was led by the continued momentum of several recently launched infant formula products as well as growth of the PediaSure® toddler brand. Excluding the effect of foreign exchange, International Adult Nutritional sales increased 3.3 percent compared to the first half of 2016 led by continued market growth across priority geographies while U.S. Adult Nutritional sales decreased 4.5 percent due to competitive and market dynamics.

 

Excluding the effect of foreign exchange, the 5.1 percent increase in Diagnostics sales was primarily driven by share gains in the Core Laboratory and Point of Care markets in the U.S. and higher sales to various international markets.  During the quarter, Abbott announced CE Mark of its new Alinity hq hematology system to identify and quantify different types of blood cells to help diagnose blood-related diseases.

 

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Table of Contents

 

Excluding the effect of foreign exchange, the 198.5 percent increase in the Cardiovascular and Neuromodulation Products segment was driven by the acquisition of St. Jude Medical which was completed on January 4, 2017. Excluding the impact of the acquisition as well as the impact of foreign exchange, sales in the Cardiovascular and Neuromodulation Products segment decreased 1.5 percent in the first six months of 2017 as lower coronary stent sales and the comparison impact from the favorable 2016 resolution of a third-party royalty agreement were partially offset by higher Structural Heart and endovascular sales.