10-Q 1 a18-19028_110q.htm 10-Q

Table of Contents

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

FORM 10-Q

 

(Mark One)

 

x      QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended September 30, 2018

 

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 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes x  No o

 

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

 

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

 

Large Accelerated Filer x

 

Accelerated Filer o

 

 

 

Non-Accelerated Filer o

 

Smaller reporting company o

 

 

 

 

 

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 September 30, 2018, Abbott Laboratories had 1,756,333,032 common shares without par value outstanding.

 

 

 


Table of Contents

 

Abbott Laboratories and Subsidiaries

Condensed Consolidated Statement of Earnings

(Unaudited)

(dollars in millions except per share data; shares in thousands)

 

 

 

Three Months Ended

 

Nine Months Ended

 

 

 

September 30

 

September 30

 

 

 

2018

 

2017

 

2018

 

2017

 

Net sales

 

$

7,656

 

$

6,829

 

$

22,813

 

$

19,801

 

 

 

 

 

 

 

 

 

 

 

Cost of products sold, excluding amortization of intangible assets

 

3,166

 

2,876

 

9,515

 

9,127

 

Amortization of intangible assets

 

544

 

501

 

1,690

 

1,415

 

Research and development

 

574

 

568

 

1,738

 

1,641

 

Selling, general and administrative

 

2,377

 

2,115

 

7,385

 

6,705

 

Total operating cost and expenses

 

6,661

 

6,060

 

20,328

 

18,888

 

 

 

 

 

 

 

 

 

 

 

Operating earnings

 

995

 

769

 

2,485

 

913

 

 

 

 

 

 

 

 

 

 

 

Interest expense

 

203

 

218

 

640

 

658

 

Interest (income)

 

(22

)

(36

)

(71

)

(89

)

Net foreign exchange (gain) loss

 

11

 

(6

)

2

 

(34

)

Net loss on extinguishment of debt

 

67

 

 

81

 

 

Other (income) expense, net

 

18

 

(33

)

(93

)

(1,279

)

Earnings from continuing operations before taxes

 

718

 

626

 

1,926

 

1,657

 

Taxes on earnings from continuing operations

 

166

 

65

 

247

 

440

 

Earnings from continuing operations

 

552

 

561

 

1,679

 

1,217

 

 

 

 

 

 

 

 

 

 

 

Earnings from discontinued operations, net of tax

 

11

 

42

 

35

 

88

 

 

 

 

 

 

 

 

 

 

 

Net Earnings

 

$

563

 

$

603

 

$

1,714

 

$

1,305

 

 

 

 

 

 

 

 

 

 

 

Basic Earnings Per Common Share —

 

 

 

 

 

 

 

 

 

Continuing operations

 

$

0.31

 

$

0.32

 

$

0.95

 

$

0.70

 

Discontinued operations

 

0.01

 

0.02

 

0.02

 

0.05

 

Net earnings

 

$

0.32

 

$

0.34

 

$

0.97

 

$

0.75

 

 

 

 

 

 

 

 

 

 

 

Diluted Earnings Per Common Share —

 

 

 

 

 

 

 

 

 

Continuing operations

 

$

0.31

 

$

0.32

 

$

0.94

 

$

0.69

 

Discontinued operations

 

0.01

 

0.02

 

0.02

 

0.05

 

Net earnings

 

$

0.32

 

$

0.34

 

$

0.96

 

$

0.74

 

 

 

 

 

 

 

 

 

 

 

Cash Dividends Declared Per Common Share

 

$

0.28

 

$

0.265

 

$

0.84

 

$

0.795

 

 

 

 

 

 

 

 

 

 

 

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

 

1,759,585

 

1,743,757

 

1,757,018

 

1,737,310

 

Dilutive Common Stock Options

 

12,095

 

10,399

 

11,692

 

8,866

 

 

 

 

 

 

 

 

 

 

 

Average Number of Common Shares Outstanding Plus Dilutive Common Stock Options

 

1,771,680

 

1,754,156

 

1,768,710

 

1,746,176

 

 

 

 

 

 

 

 

 

 

 

Outstanding Common Stock Options Having No Dilutive Effect

 

44

 

282

 

44

 

282

 

 

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

 

3


Table of Contents

 

Abbott Laboratories and Subsidiaries

Condensed Consolidated Statement of Comprehensive Income

(Unaudited)

(dollars in millions)

 

 

 

Three Months Ended

 

Nine Months Ended

 

 

 

September 30

 

September 30

 

 

 

2018

 

2017

 

2018

 

2017

 

Net Earnings

 

$

563

 

$

603

 

$

1,714

 

$

1,305

 

Foreign currency translation gain (loss) adjustments

 

(153

)

285

 

(1,179

)

1,106

 

Net actuarial gains (losses) and amortization of net actuarial (losses) and prior service (cost) and credits, net of taxes of $16 and $48 in 2018 and $11 and $34 in 2017

 

22

 

23

 

106

 

86

 

Unrealized gains (losses) on marketable equity securities, net of taxes of $2 and $62 in 2017

 

 

(136

)

 

(54

)

Net gains (losses) for derivative instruments designated as cash flow hedges and other, net of taxes of $16 and $44 in 2018 and $(10) and $(49) in 2017

 

35

 

(38

)

121

 

(140

)

Other comprehensive income (loss)

 

(96

)

134

 

(952

)

998

 

Comprehensive Income (Loss)

 

$

467

 

$

737

 

$

762

 

$

2,303

 

 

 

 

September 30,
2018

 

December 31,
2017

 

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

 

 

 

 

 

Cumulative foreign currency translation (loss) adjustments

 

$

(4,631

)

$

(3,452

)

Net actuarial (losses) and prior service (costs) and credits

 

(2,415

)

(2,521

)

Cumulative unrealized gains (losses) on marketable equity securities

 

 

(5

)

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

 

37

 

(84

)

Accumulated other comprehensive income (loss)

 

$

(7,009

)

$

(6,062

)

 

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

 

4


Table of Contents

 

Abbott Laboratories and Subsidiaries

Condensed Consolidated Balance Sheet

(Unaudited)

(dollars in millions)

 

 

 

September 30,
2018

 

December 31,
2017

 

Assets

 

 

 

 

 

Current Assets:

 

 

 

 

 

Cash and cash equivalents

 

$

7,369

 

$

9,407

 

Short-term investments

 

181

 

203

 

Trade receivables, less allowances of $326 in 2018 and $294 in 2017

 

5,271

 

5,249

 

Inventories:

 

 

 

 

 

Finished products

 

2,340

 

2,339

 

Work in process

 

561

 

472

 

Materials

 

880

 

790

 

Total inventories

 

3,781

 

3,601

 

Prepaid expenses and other receivables

 

1,582

 

1,667

 

Current assets held for disposition

 

12

 

20

 

Total Current Assets

 

18,196

 

20,147

 

Investments

 

971

 

883

 

Property and equipment, at cost

 

15,520

 

15,265

 

Less: accumulated depreciation and amortization

 

8,072

 

7,658

 

Net property and equipment

 

7,448

 

7,607

 

Intangible assets, net of amortization

 

19,477

 

21,473

 

Goodwill

 

23,416

 

24,020

 

Deferred income taxes and other assets

 

2,110

 

1,944

 

Non-current assets held for disposition

 

19

 

176

 

 

 

$

71,637

 

$

76,250

 

Liabilities and Shareholders’ Investment

 

 

 

 

 

Current Liabilities:

 

 

 

 

 

Short-term borrowings

 

$

211

 

$

206

 

Trade accounts payable

 

2,730

 

2,402

 

Salaries, wages and commissions

 

1,241

 

1,187

 

Other accrued liabilities

 

3,807

 

3,811

 

Dividends payable

 

493

 

489

 

Income taxes payable

 

231

 

309

 

Current portion of long-term debt

 

4,063

 

508

 

Total Current Liabilities

 

12,776

 

8,912

 

Long-term debt

 

19,284

 

27,210

 

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

 

8,679

 

9,030

 

Commitments and Contingencies

 

 

 

 

 

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: 2018: 1,970,590,472; 2017: 1,965,908,188

 

23,428

 

23,206

 

Common shares held in treasury, at cost — Shares: 2018: 214,257,440; 2017: 222,305,719

 

(9,858

)

(10,225

)

Earnings employed in the business

 

24,144

 

23,978

 

Accumulated other comprehensive income (loss)

 

(7,009

)

(6,062

)

Total Abbott Shareholders’ Investment

 

30,705

 

30,897

 

Noncontrolling Interests in Subsidiaries

 

193

 

201

 

Total Shareholders’ Investment

 

30,898

 

31,098

 

 

 

$

71,637

 

$

76,250

 

 

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

 

5


Table of Contents

 

Abbott Laboratories and Subsidiaries

Condensed Consolidated Statement of Cash Flows

(Unaudited)

(dollars in millions)

 

 

 

Nine Months Ended September 30

 

 

 

2018

 

2017

 

Cash Flow From (Used in) Operating Activities:

 

 

 

 

 

Net earnings

 

$

1,714

 

$

1,305

 

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

 

 

 

 

 

Depreciation

 

825

 

763

 

Amortization of intangible assets

 

1,690

 

1,415

 

Share-based compensation

 

396

 

338

 

Amortization of inventory step-up

 

32

 

840

 

Gain on sale of businesses

 

 

(1,163

)

Trade receivables

 

(280

)

(169

)

Inventories

 

(450

)

39

 

Other, net

 

608

 

562

 

Net Cash From Operating Activities

 

4,535

 

3,930

 

 

 

 

 

 

 

Cash Flow From (Used in) Investing Activities:

 

 

 

 

 

Acquisitions of property and equipment

 

(927

)

(790

)

Acquisitions of businesses and technologies, net of cash acquired

 

 

(13,027

)

Proceeds from business dispositions

 

48

 

5,442

 

Proceeds from the sale of Mylan N.V. shares

 

 

1,977

 

Sales (purchases) of other investment securities, net

 

(23

)

(98

)

Other

 

42

 

30

 

Net Cash (Used in) Investing Activities

 

(860

)

(6,466

)

 

 

 

 

 

 

Cash Flow From (Used in) Financing Activities:

 

 

 

 

 

Net borrowings (repayments) of short-term debt and other

 

22

 

(1,424

)

Proceeds from issuance of long-term debt

 

4,011

 

 

Repayments of long-term debt

 

(8,279

)

(2,508

)

Payment of debt issuance costs

 

 

(8

)

Payment of contingent consideration

 

 

(13

)

Purchases of common shares

 

(134

)

(106

)

Proceeds from stock options exercised

 

244

 

275

 

Dividends paid

 

(1,479

)

(1,385

)

Net Cash (Used in) Financing Activities

 

(5,615

)

(5,169

)

 

 

 

 

 

 

Effect of exchange rate changes on cash and cash equivalents

 

(98

)

97

 

 

 

 

 

 

 

Net Decrease in Cash and Cash Equivalents

 

(2,038

)

(7,608

)

Cash and Cash Equivalents, Beginning of Year

 

9,407

 

18,620

 

Cash and Cash Equivalents, End of Period

 

$

7,369

 

$

11,012

 

 

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

 

6


Table of Contents

 

Abbott Laboratories and Subsidiaries

Notes to the Condensed Consolidated Financial Statements

September 30, 2018

(Unaudited)

 

Note 1 — Basis of Presentation

 

The accompanying unaudited, condensed consolidated financial statements have been prepared pursuant to rules and regulations of the Securities and Exchange Commission and, therefore, do not include all information and footnote disclosures normally included in audited financial statements.  However, in the opinion of management, all adjustments (which include only normal adjustments) necessary to present fairly the results of operations, financial position and cash flows have been made.  It is suggested that these statements be read in conjunction with the financial statements included in Abbott’s Annual Report on Form 10-K for the year ended December 31, 2017.  The condensed consolidated financial statements include the accounts of the parent company and subsidiaries, after elimination of intercompany transactions.

 

Note 2 — New Accounting Standards

 

Recently Adopted Accounting Standards

 

In March 2017, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2017-07, Compensation — Retirement Benefits (Topic 715): Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost which changes the financial statement presentation requirements for pension and other postretirement benefit expense.  While service cost continues to be reported in the same financial statement line items as other current employee compensation costs, the ASU requires all other components of pension and other postretirement benefit expense to be presented separately from service cost, and outside any subtotal of income from operations.  Abbott adopted the standard in the first quarter of 2018 and the Condensed Consolidated Statement of Earnings was retrospectively adjusted, resulting in the reclassification of approximately $120 million of income from Operating earnings to Other (income) expense, net in the first nine months of 2017.

 

In November 2016, the FASB issued ASU 2016-18, Statement of Cash Flows: Restricted Cash, which requires that restricted cash be included with cash and cash equivalents when reconciling the beginning and end-of-period total amounts shown on the statement of cash flows.  Abbott adopted this standard beginning in the first quarter of 2018, and applied the guidance retrospectively to all periods presented.  Abbott did not have any restricted cash balances in the periods presented except for $75 million of restricted cash acquired as part of the Alere Inc. acquisition in October 2017.  The restrictions on this cash were eliminated prior to the end of 2017.

 

In October 2016, the FASB issued ASU 2016-16, Income Taxes (Topic 740): Intra-Entity Transfers of Assets Other Than Inventory, which requires the recognition of the income tax effects of intercompany sales and transfers of assets, other than inventory, in the period in which the transfer occurs.  Abbott adopted the standard on January 1, 2018, using a modified retrospective approach and recorded a cumulative catch-up adjustment to Earnings employed in the business in the Condensed Consolidated Balance Sheet that was not significant.

 

In August 2016, the FASB issued ASU 2016-15, Statement of Cash Flows: Classification of Certain Cash Receipts and Cash Payments, which clarifies how companies should present and classify certain cash receipts and cash payments in the statement of cash flows.  The ASU became effective for Abbott in the first quarter of 2018 and did not have a material impact to the Company’s Condensed Consolidated Statement of Cash Flows.

 

In January 2016, the FASB issued ASU 2016-01, Financial Instruments — Recognition and Measurement of Financial Assets and Financial Liabilities, which provides new guidance for the recognition, measurement, presentation, and disclosure of financial assets and liabilities.  Abbott adopted the standard on January 1, 2018.  Under the new standard, changes in the fair value of equity investments with readily determinable fair values are recorded in Other (income) expense, net within the Condensed Consolidated Statement of Earnings.  Previously, such fair value changes were recorded in other comprehensive income.  Abbott has elected the measurement alternative allowed by ASU 2016-01 for its equity investments without readily determinable fair values.  These investments are measured at cost, less any impairment, plus or minus any changes resulting from observable price changes in orderly transactions for an identical or similar investment of the same issuer.  Changes in the measurement of these investments are being recorded in Other (income) expense, net within the Condensed Consolidated Statement of Earnings.  As part of the adoption, the cumulative-effect adjustment to Earnings employed in the business in the Condensed Consolidated Balance Sheet for net unrealized losses on equity investments that were recorded in Accumulated other comprehensive income (loss) as of December 31, 2017 was not significant.

 

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Table of Contents

 

Abbott Laboratories and Subsidiaries

Notes to the Condensed Consolidated Financial Statements

September 30, 2018

(Unaudited)

 

In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers, which provides a single comprehensive model for accounting for revenue from contracts with customers and supersedes nearly all previously existing revenue recognition guidance.  The core principle of the ASU is that an entity should recognize revenue when it transfers promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services.  Abbott adopted the new standard as of January 1, 2018, using the modified retrospective approach method.  Under this method, entities recognize the cumulative effect of applying the new standard at the date of initial application with no restatement of comparative periods presented.  The cumulative effect of applying the new standard resulted in an increase to Earnings employed in the business in the Condensed Consolidated Balance Sheet of $23 million which was recorded on January 1, 2018.  The new standard has been applied only to those contracts that were not completed as of January 1, 2018.  The impact of adopting ASU 2014-09 was not significant to individual financial statement line items in the Condensed Consolidated Balance Sheet and Condensed Consolidated Statement of Earnings.

 

Recent Accounting Standards Not Yet Adopted

 

In February 2018, the FASB issued ASU 2018-02, Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income, which allows companies to reclassify stranded tax effects resulting from the 2017 Tax Cuts and Jobs Act, from accumulated other comprehensive income to retained earnings.  The standard becomes effective for Abbott beginning in the first quarter of 2019 and early adoption is permitted.  Abbott is currently evaluating the effect that the new guidance will have on its consolidated financial statements.

 

In August 2017, the FASB issued ASU 2017-12, Targeted Improvements to Accounting for Hedging Activities, which makes changes to the designation and measurement guidance for qualifying hedging relationships and the presentation of hedge results.  The standard becomes effective for Abbott beginning in the first quarter of 2019 and early adoption is permitted.  Abbott is currently evaluating the effect that the new guidance will have on its consolidated financial statements.

 

In February 2016, the FASB issued ASU 2016-02, Leases, which requires lessees to recognize assets and liabilities for most leases on the balance sheet.  The standard becomes effective for Abbott beginning in the first quarter of 2019 and early adoption is permitted.  Abbott will elect the transition method that allows the company to apply the standard at its adoption date rather than the beginning of the earliest comparative period presented in the financial statements.  Abbott is currently evaluating the effect that the new guidance will have on its consolidated financial statements.

 

Note 3 — Revenue

 

Abbott’s revenues are derived primarily from the sale of a broad line of health care products under short-term receivable arrangements.  Patent protection and licenses, technological and performance features, and inclusion of Abbott’s products under a contract most impact which products are sold; price controls, competition and rebates most impact the net selling prices of products; and foreign currency translation impacts the measurement of net sales and costs.  Abbott’s products are generally sold directly to retailers, wholesalers, distributors, hospitals, health care facilities, laboratories, physicians’ offices and government agencies throughout the world.  Abbott has four reportable segments: Established Pharmaceutical Products, Diagnostic Products, Nutritional Products, and Cardiovascular and Neuromodulation Products.  Diabetes Care is a non-reportable segment and is included in Other in the following table.

 

8


Table of Contents

 

Abbott Laboratories and Subsidiaries

Notes to the Condensed Consolidated Financial Statements

September 30, 2018

(Unaudited)

 

The following tables provide detail by sales category:

 

 

 

Three Months Ended September 30, 2018

 

Three Months Ended September 30, 2017

 

(in millions)

 

U.S.

 

Int’l

 

Total

 

U.S.

 

Int’l

 

Total

 

Established Pharmaceutical Products —

 

 

 

 

 

 

 

 

 

 

 

 

 

Key Emerging Markets

 

$

 

$

866

 

$

866

 

$

 

$

885

 

$

885

 

Other

 

 

293

 

293

 

 

286

 

286

 

Total

 

 

1,159

 

1,159

 

 

1,171

 

1,171

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Nutritionals —

 

 

 

 

 

 

 

 

 

 

 

 

 

Pediatric Nutritionals

 

459

 

580

 

1,039

 

436

 

539

 

975

 

Adult Nutritionals

 

315

 

484

 

799

 

323

 

470

 

793

 

Total

 

774

 

1,064

 

1,838

 

759

 

1,009

 

1,768

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Diagnostics —

 

 

 

 

 

 

 

 

 

 

 

 

 

Core Laboratory

 

249

 

837

 

1,086

 

230

 

803

 

1,033

 

Molecular

 

37

 

84

 

121

 

37

 

78

 

115

 

Point of Care

 

106

 

30

 

136

 

102

 

29

 

131

 

Rapid Diagnostics

 

274

 

207

 

481

 

 

 

 

Total

 

666

 

1,158

 

1,824

 

369

 

910

 

1,279

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cardiovascular and Neuromodulation —

 

 

 

 

 

 

 

 

 

 

 

 

 

Rhythm Management

 

252

 

256

 

508

 

250

 

261

 

511

 

Electrophysiology

 

189

 

217

 

406

 

147

 

195

 

342

 

Heart Failure

 

111

 

41

 

152

 

131

 

39

 

170

 

Vascular

 

284

 

436

 

720

 

292

 

432

 

724

 

Structural Heart

 

126

 

179

 

305

 

109

 

160

 

269

 

Neuromodulation

 

172

 

40

 

212

 

164

 

44

 

208

 

Total

 

1,134

 

1,169

 

2,303

 

1,093

 

1,131

 

2,224

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other

 

133

 

399

 

532

 

92

 

295

 

387

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total

 

$

2,707

 

$

4,949

 

$

7,656

 

$

2,313

 

$

4,516

 

$

6,829

 

 

 

 

Nine Months Ended September 30, 2018

 

Nine Months Ended September 30, 2017

 

(in millions)

 

U.S.

 

Int’l

 

Total

 

U.S.

 

Int’l

 

Total

 

Established Pharmaceutical Products —

 

 

 

 

 

 

 

 

 

 

 

 

 

Key Emerging Markets

 

$

 

$

2,525

 

$

2,525

 

$

 

$

2,413

 

$

2,413

 

Other

 

 

807

 

807

 

 

729

 

729

 

Total

 

 

3,332

 

3,332

 

 

3,142

 

3,142

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Nutritionals —

 

 

 

 

 

 

 

 

 

 

 

 

 

Pediatric Nutritionals

 

1,376

 

1,708

 

3,084

 

1,327

 

1,562

 

2,889

 

Adult Nutritionals

 

937

 

1,431

 

2,368

 

935

 

1,317

 

2,252

 

Total

 

2,313

 

3,139

 

5,452

 

2,262

 

2,879

 

5,141

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Diagnostics —

 

 

 

 

 

 

 

 

 

 

 

 

 

Core Laboratory

 

725

 

2,508

 

3,233

 

678

 

2,286

 

2,964

 

Molecular

 

114

 

247

 

361

 

123

 

218

 

341

 

Point of Care

 

324

 

92

 

416

 

324

 

81

 

405

 

Rapid Diagnostics

 

855

 

669

 

1,524

 

 

 

 

Total

 

2,018

 

3,516

 

5,534

 

1,125

 

2,585

 

3,710

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cardiovascular and Neuromodulation —

 

 

 

 

 

 

 

 

 

 

 

 

 

Rhythm Management

 

778

 

808

 

1,586

 

783

 

791

 

1,574

 

Electrophysiology

 

564

 

661

 

1,225

 

446

 

555

 

1,001

 

Heart Failure

 

342

 

126

 

468

 

363

 

108

 

471

 

Vascular

 

854

 

1,355

 

2,209

 

891

 

1,267

 

2,158

 

Structural Heart

 

353

 

560

 

913

 

320

 

473

 

793

 

Neuromodulation

 

513

 

133

 

646

 

461

 

129

 

590

 

Total

 

3,404

 

3,643

 

7,047

 

3,264

 

3,323

 

6,587

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other

 

349

 

1,099

 

1,448

 

346

 

875

 

1,221

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total

 

$

8,084

 

$

14,729

 

$

22,813

 

$

6,997

 

$

12,804

 

$

19,801

 

 

9


Table of Contents

 

Abbott Laboratories and Subsidiaries

Notes to the Condensed Consolidated Financial Statements

September 30, 2018

(Unaudited)

 

Abbott recognizes revenue from product sales upon the transfer of control, which is generally upon shipment or delivery, depending on the delivery terms set forth in the customer contract.  For maintenance agreements that provide service beyond Abbott’s standard warranty and other service agreements, revenue is recognized ratably over the contract term.  A time-based measure of progress appropriately reflects the transfer of services to the customer.  Payment terms between Abbott and its customers vary by the type of customer, country of sale, and the products or services offered.  The term between invoicing and the payment due date is not significant.

 

Management exercises judgment in estimating variable consideration.  Provisions for discounts, rebates and sales incentives to customers, and returns and other adjustments are provided for in the period the related sales are recorded.  Sales incentives to customers are not material.  Historical data is readily available and reliable, and is used for estimating the amount of the reduction in gross sales.  Abbott provides rebates to government agencies, wholesalers, group purchasing organizations and other private entities.

 

Rebate amounts are usually based upon the volume of purchases using contractual or statutory prices for a product.  Factors used in the rebate calculations include the identification of which products have been sold subject to a rebate, which customer or government agency price terms apply, and the estimated lag time between sale and payment of a rebate.  Using historical trends, adjusted for current changes, Abbott estimates the amount of the rebate that will be paid, and records the liability as a reduction of gross sales when Abbott records its sale of the product.  Settlement of the rebate generally occurs from one to six months after sale.  Abbott regularly analyzes the historical rebate trends and makes adjustments to reserves for changes in trends and terms of rebate programs.  Historically, adjustments to prior years’ rebate accruals have not been material to net income.

 

Other allowances charged against gross sales include cash discounts and returns, which are not significant.  Cash discounts are known within 15 to 30 days of sale, and therefore can be reliably estimated.  Returns can be reliably estimated because Abbott’s historical returns are low, and because sales return terms and other sales terms have remained relatively unchanged for several periods.  Product warranties are also not significant.

 

Abbott also applies judgment in determining the timing of revenue recognition related to contracts that include multiple performance obligations.  The total transaction price of the contract is allocated to each performance obligation in an amount based on the estimated relative standalone selling prices of the promised goods or services underlying each performance obligation.  For goods or services for which observable standalone selling prices are not available, Abbott uses an expected cost plus a margin approach to estimate the standalone selling price of each performance obligation.

 

Remaining Performance Obligations

 

As of September 30, 2018, the estimated revenue expected to be recognized in the future related to performance obligations that are unsatisfied (or partially unsatisfied) was approximately $2.8 billion in the Diagnostics segment and approximately $330 million in the Cardiovascular and Neuromodulation segment.  Abbott expects to recognize revenue on approximately 60% of these remaining performance obligations over the next 24 months, approximately 15% over the subsequent 12 months and the remainder thereafter.

 

These performance obligations primarily reflect the future sale of reagents/consumables in contracts with minimum purchase obligations, extended warranty or service obligations related to previously sold equipment, and remote monitoring services related to previously implanted devices.  Abbott has applied the practical expedient described in Accounting Standards Codification (ASC) 606-10-50-14 and has not included remaining performance obligations related to contracts with original expected durations of one year or less in the amounts above.

 

Assets Recognized for Costs to Obtain a Contract with a Customer

 

Abbott has applied the practical expedient in ASC 340-40-25-4 and records as an expense the incremental costs of obtaining contracts with customers in the period of occurrence when the amortization period of the asset that Abbott otherwise would have recognized is one year or less.  Upfront commission fees paid to sales personnel as a result of obtaining or renewing contracts with customers are incremental to obtaining the contract.  Abbott capitalizes these amounts as contract costs.  Capitalized commission fees are amortized based on the contract duration to which the assets relate which ranges from two to ten years.  The amounts as of September 30, 2018, were not significant.

 

Additionally, the cost of transmitters provided to customers that use Abbott’s remote monitoring service with respect to certain medical devices are capitalized as contract costs.  Capitalized transmitter costs are amortized based on the timing of the transfer of services to which the assets relate, which typically ranges from eight to ten years.  The amounts as of September 30, 2018, were not significant.

 

10


Table of Contents

 

Abbott Laboratories and Subsidiaries

Notes to the Condensed Consolidated Financial Statements

September 30, 2018

(Unaudited)

 

Other Contract Assets and Liabilities

 

Abbott discloses Trade receivables separately in the Condensed Consolidated Balance Sheet at their net realizable value.  Contract assets primarily relate to Abbott’s conditional right to consideration for work completed but not billed at the reporting date.  Contract assets at the beginning and end of the period, as well as the changes in the balance, were not significant.

 

Contract liabilities primarily relate to payments received from customers in advance of performance under the contract.  Abbott’s contract liabilities arise primarily in the Cardiovascular and Neuromodulation reportable segment when payment is received upfront for various multi-period extended service arrangements.  Changes in the contract liabilities during the period are as follows:

 

(in millions)

 

 

 

Contract Liabilities

 

 

 

Balance at January 1, 2018

 

$

198

 

Unearned revenue from cash received during the period

 

209

 

Revenue recognized that was included in contract liability balance at beginning of period

 

(155

)

Balance at September 30, 2018

 

$

252

 

 

Note 4 — Discontinued Operations

 

On January 1, 2013, Abbott completed the separation of AbbVie Inc. (AbbVie), which was formed to hold Abbott’s research-based proprietary pharmaceuticals business.  Abbott has retained all liabilities for all U.S. federal and foreign income taxes on income prior to the separation, as well as certain non-income related taxes attributable to AbbVie’s business prior to the separation.  AbbVie generally will be liable for all other taxes attributable to its business.  Earnings from discontinued operations, net of tax, of $35 million and $88 million in the first nine months of 2018 and 2017, respectively, were driven primarily by the recognition of net tax benefits as a result of the resolution of various tax positions related to AbbVie’s operations for years prior to the separation.

 

Note 5 — Assets Held for Disposition

 

As discussed in Note 8 - Business Acquisitions, in conjunction with the acquisition of Alere Inc. (Alere), Abbott sold the Triage® MeterPro cardiovascular and toxicology business and the assets and liabilities related to its B-type Natriuretic Peptide assay business run on Beckman Coulter analyzers to Quidel Corporation (Quidel).  The legal transfer of certain assets and liabilities related to these businesses did not occur at the close of the sale to Quidel due to, among other factors, the time required to transfer marketing authorizations and other regulatory requirements in various countries.  Under the terms of the sale agreement with Abbott, Quidel is subject to the risks and entitled to the benefits generated by these operations and assets.  The assets presented as held for disposition in the Condensed Consolidated Balance Sheet as of September 30, 2018 and December 31, 2017, primarily relate to the businesses sold to Quidel.  The decrease in net assets held for disposition primarily represents the completion of the transfer of certain assets and liabilities to Quidel.

 

(in millions)

 

September 30,
2018

 

December 31,
2017

 

Trade receivables, net

 

$

9

 

$

12

 

Total inventories

 

3

 

8

 

Current assets held for disposition

 

12

 

20

 

Net property and equipment

 

 

56

 

Intangible assets, net of amortization

 

 

18

 

Goodwill

 

19

 

102

 

Non-current assets held for disposition

 

19

 

176

 

Total assets held for disposition

 

$

31

 

$

196

 

 

11


Table of Contents

 

Abbott Laboratories and Subsidiaries

Notes to the Condensed Consolidated Financial Statements

September 30, 2018

(Unaudited)

 

Note 6 — Supplemental Financial Information

 

Shares of unvested restricted stock that contain non-forfeitable rights to dividends are treated as participating securities and are included in the computation of earnings per share under the two-class method.  Under the two-class method, net earnings are allocated between common shares and participating securities.  Earnings from Continuing Operations allocated to common shares for the three months ended September 30, 2018 and 2017 were $548 million and $558 million, respectively and for the nine months ended September 30, 2018 and 2017 were $1.669 billion and $1.211 billion, respectively.  Net earnings allocated to common shares for the three months ended September 30, 2018 and 2017 were $560 million and $601 million, respectively, and for the nine months ended September 30, 2018 and 2017 were $1.704 billion and $1.299 billion, respectively.

 

Other, net in Net cash from operating activities in the Condensed Consolidated Statement of Cash Flows for the first nine months of 2018 includes the favorable impact of improvements in working capital management, as well as the effect of non-cash charges related to the impairment of certain assets and the accrual of certain debt extinguishment costs.  The first nine months of 2017 includes the effects of contributions to defined benefit plans of $335 million.  The first nine months of 2017 also includes the impact of improved working capital management and approximately $435 million of tax expense related to business dispositions.

 

In February 2017, Abbott completed the sale of Abbott Medical Optics (AMO) to Johnson & Johnson and recognized a pre-tax gain of $1.163 billion, which is reported in Other (income) expense, net within the Condensed Consolidated Statement of Earnings in the first nine months of 2017.  Abbott recorded an after-tax gain of $728 million in the first nine months of 2017 related to the sale of AMO.  The operating results of AMO up through the date of sale continued to be included in Earnings from Continuing Operations as they did not qualify for reporting as discontinued operations.  For the first nine months ended September 30, 2017, the AMO losses before taxes included in Abbott’s consolidated earnings were $18 million.

 

In the first nine months of 2017, Abbott sold 51 million ordinary shares of Mylan N.V. received upon the sale of its developed markets branded generics pharmaceuticals business to Mylan Inc.  Abbott received $1.977 billion in proceeds from the sale of these shares.  Abbott recorded an immaterial pre-tax gain in the first nine months of 2017, which was recognized in the Other (income) expense, net line of the Condensed Consolidated Statement of Earnings.

 

The components of long-term investments as of September 30, 2018 and December 31, 2017 are as follows:

 

Long-term Investments

 

September 30,

 

December 31,

 

(in millions)

 

2018

 

2017

 

Equity securities

 

$

934

 

$

797

 

Other

 

37

 

86

 

Total

 

$

971

 

$

883

 

 

Abbott’s equity securities as of September 30, 2018, include approximately $350 million of investments in mutual funds that are held in a rabbi trust and were acquired as part of the St. Jude Medical, Inc. (St. Jude Medical) business acquisition.  These investments, which are specifically designated as available for the purpose of paying benefits under a deferred compensation plan, are not available for general corporate purposes and are subject to creditor claims in the event of insolvency.

 

Abbott also holds certain investments as of September 30, 2018 with a carrying value of approximately $355 million that are accounted for under the equity method of accounting and other equity investments with a carrying value of approximately $220 million that do not have a readily determinable fair value.  The $220 million carrying value includes an unrealized gain of approximately $50 million on an investment.  The gain was recorded in the second quarter of 2018 and relates to an observable price change for a similar investment of the same issuer.

 

12


Table of Contents

 

Abbott Laboratories and Subsidiaries

Notes to the Condensed Consolidated Financial Statements

September 30, 2018

(Unaudited)

 

Note 7 — Changes in Accumulated Other Comprehensive Income (Loss)

 

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

 

 

 

Three Months Ended September 30

 

 

 

Cumulative Foreign
Currency Translation
Adjustments

 

Net Actuarial
(Losses) and Prior
Service (Costs)
and Credits

 

Cumulative
Unrealized Gains
(Losses) on
Marketable Equity
Securities

 

Cumulative Gains
(Losses) on

Derivative
Instruments
Designated as
Cash Flow Hedges

 

(in millions)

 

2018

 

2017

 

2018

 

2017

 

2018

 

2017

 

2018

 

2017

 

Balance at June 30

 

$

(4,478

)

$

(3,996

)

$

(2,437

)

$

(2,215

)

$

 

$

13

 

$

2

 

$

(52

)

Other comprehensive income (loss) before reclassifications

 

(153

)

285

 

 

 

 

(136

)

10

 

(44

)

Amounts reclassified from accumulated other comprehensive income

 

 

 

22

 

23

 

 

 

25

 

6

 

Net current period comprehensive income (loss)

 

(153

)

285

 

22

 

23

 

 

(136

)

35

 

(38

)

Balance at September 30

 

$

(4,631

)

$

(3,711

)

$

(2,415

)

$

(2,192

)

$

 

$

(123

)

$

37

 

$

(90

)

 

 

 

Nine Months Ended September 30

 

 

 

Cumulative Foreign
Currency Translation
Adjustments

 

Net Actuarial
(Losses) and Prior
Service (Costs)
and Credits

 

Cumulative
Unrealized Gains
(Losses) on
Marketable Equity
Securities

 

Cumulative Gains
(Losses) on
Derivative
Instruments
Designated as
Cash Flow Hedges

 

(in millions)

 

2018

 

2017

 

2018

 

2017

 

2018

 

2017

 

2018

 

2017

 

Balance at December 31, 2017 and 2016

 

$

(3,452

)

$

(4,959

)

$

(2,521

)

$

(2,284

)

$

(5

)

$

(69

)

$

(84

)

$

49

 

Reclassified to Earnings employed in the business for adoption of ASU 2016-01

 

 

 

 

 

5

 

 

 

 

Impact of business dispositions

 

 

142

 

 

6

 

 

 

 

1

 

Other comprehensive income (loss) before reclassifications

 

(1,179

)

1,106

 

 

 

 

47

 

38

 

(151

)

Amounts reclassified from accumulated other comprehensive income

 

 

 

106

 

86

 

 

(101

)

83

 

11

 

Net current period comprehensive income (loss)

 

(1,179

)

1,106

 

106

 

86

 

 

(54

)

121

 

(140

)

Balance at September 30

 

$

(4,631

)

$

(3,711

)

$

(2,415

)

$

(2,192

)

$

 

$

(123

)

$

37

 

$

(90

)

 

Reclassified amounts for foreign currency translation are recorded in the Condensed Consolidated Statement of Earnings as Net foreign exchange (gain) loss; gains (losses) on marketable equity securities as Other (income) expense, 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 15 for additional details.

 

13


Table of Contents

 

Abbott Laboratories and Subsidiaries

Notes to the Condensed Consolidated Financial Statements

September 30, 2018

(Unaudited)

 

Note 8 — Business Acquisitions

 

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

 

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

 

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

 

On October 3, 2017, Abbott acquired Alere, a diagnostic device and service provider, for $51.00 per common share in cash, which equated to a purchase price of approximately $4.5 billion.  As part of the acquisition, Abbott tendered for Alere’s preferred shares for a total value of approximately $0.7 billion.  In addition, approximately $3.0 billion of Alere’s debt was assumed and subsequently repaid.  The acquisition establishes Abbott as a leader in point of care testing, expands Abbott’s global diagnostics presence and provides access to new products, channels and geographies.  Abbott utilized a combination of cash on hand and debt to fund the acquisition.

 

The final allocation of the fair value of the Alere acquisition is shown in the table below:

 

(in billions)

 

 

 

Acquired intangible assets, non-deductible

 

$

3.5

 

Goodwill, non-deductible

 

3.7

 

Acquired net tangible assets

 

1.0

 

Deferred income taxes recorded at acquisition

 

(0.4

)

Net debt

 

(2.6

)

Preferred stock

 

(0.7

)

Total allocation of fair value

 

$

4.5

 

 

The goodwill is primarily attributable to expected synergies from combining operations, as well as intangible assets that do not qualify for separate recognition.  The goodwill is identifiable to the Diagnostic Products reportable segment.  The approximate value of the acquired tangible assets is $430 million of trade accounts receivable, $425 million of inventory, $225 million of other current assets, $540 million of property and equipment, and $210 million of other long-term assets.  The approximate value of the acquired tangible liabilities is $675 million of trade accounts payable and other current liabilities and $145 million of other non-current liabilities.

 

In the third quarter of 2017, Alere entered into agreements to sell its Triage MeterPro cardiovascular and toxicology business and the assets and liabilities related to its B-type Natriuretic Peptide assay business run on Beckman Coulter analyzers to Quidel.  The transactions with Quidel reflect a total purchase price of $400 million payable at the close of the transaction, $240 million payable in six annual installments beginning approximately six months after the close of the transaction, and contingent consideration with a maximum value of $40 million.  In the third quarter of 2017, Alere entered into an agreement with Siemens Diagnostics Holding II B.V. (Siemens) to sell its subsidiary, Epocal Inc., for approximately $200 million payable at the close of the transaction.  Alere agreed to divest these businesses in connection with the review by the Federal Trade Commission and the European Commission of Abbott’s agreement to acquire Alere.  The sale to Quidel closed on October 6, 2017, and the sale to Siemens closed on October 31, 2017.  No gain or loss on these sales was recorded in the Condensed Consolidated Statement of Earnings.

 

14


Table of Contents

 

Abbott Laboratories and Subsidiaries

Notes to the Condensed Consolidated Financial Statements

September 30, 2018

(Unaudited)

 

On July 17, 2017, Abbott commenced a tender offer to purchase for cash the 1.77 million outstanding shares of Alere’s Series B Convertible Perpetual Preferred Stock at a price of $402 per share, plus accrued but unpaid dividends to, but not including, the settlement date of the tender offer.  This tender offer was subject to the satisfaction of certain conditions, including Abbott’s acquisition of Alere and upon there being validly tendered (and not properly withdrawn) at the expiration date of the tender offer that number of shares of Preferred Stock that equaled at least a majority of the Preferred Stock issued and outstanding at the expiration of the tender offer.  The tender offer expired on October 3, 2017.  All conditions to the offer were satisfied and Abbott accepted for payment the 1.748 million shares of Preferred Stock that were validly tendered (and not properly withdrawn).  The remaining shares were cashed out for an amount equal to the $400.00 per share liquidation preference of such shares, plus accrued but unpaid dividends, without interest.  Payment for all of the shares of Preferred Stock was made in the fourth quarter of 2017.

 

Note 9 — Goodwill and Intangible Assets

 

The total amount of goodwill reported was $23.4 billion at September 30, 2018 and $24.0 billion at December 31, 2017.  The amounts reported at September 30, 2018 and December 31, 2017 exclude goodwill reported in non-current assets held for disposition.  Foreign currency translation adjustments decreased goodwill by approximately $277 million in the first nine months of 2018.  Purchase price accounting adjustments associated with the Alere acquisition decreased goodwill by $326 million in the first nine months of 2018.  The amount of goodwill related to reportable segments at September 30, 2018 was $3.1 billion for the Established Pharmaceutical Products segment, $286 million for the Nutritional Products segment, $3.7 billion for the Diagnostic Products segment, and $15.4 billion for the Cardiovascular and Neuromodulation Products segment.  There was no reduction of goodwill relating to impairments in the first nine months of 2018.

 

The gross amount of amortizable intangible assets, primarily product rights and technology was $25.7 billion as of September 30, 2018 and $25.6 billion as of December 31, 2017, and accumulated amortization was $9.8 billion as of September 30, 2018 and $8.1 billion as of December 31, 2017.  Purchase price allocation adjustments increased intangible assets by $280 million and foreign currency translation adjustments decreased intangible assets by $225 million during the first nine months of 2018.  The September 30, 2018 and December 31, 2017 amounts exclude net intangible assets reported in non-current assets held for disposition.  Abbott’s estimated annual amortization expense for intangible assets is approximately $2.4 billion in 2018, $2.3 billion in 2019, $2.1 billion in 2020, $2.0 billion in 2021 and $2.0 billion in 2022.  Amortizable intangible assets are amortized over 2 to 20 years (weighted average 12 years).

 

Indefinite-lived intangible assets, which relate to in-process research and development acquired in a business combination, were approximately $3.6 billion and $3.9 billion as of September 30, 2018 and December 31, 2017, respectively.  The decrease in indefinite-lived intangible assets during the first nine months of 2018 primarily relates to purchase price allocation adjustments associated with the Alere acquisition.

 

Note 10 — Restructuring Plans

 

In 2017 and 2018, Abbott management approved restructuring plans as part of the integration of the acquisition of St. Jude Medical into the Cardiovascular and Neuromodulation segment and Alere into the Diagnostics segment, in order to leverage economies of scale and reduce costs.  In the first nine months of 2018, charges of $45 million, including one-time employee termination benefits were recognized, of which $4 million is recorded in Cost of products sold, $10 million is recorded in Research and development and $31 million as Selling, general and administrative expense.  The following summarizes the activity for the first nine months of 2018 related to these actions and the status of the related accrual as of September 30, 2018:

 

(in millions)

 

 

 

Accrued balance at December 31, 2017

 

$

68

 

Restructuring charges recorded in 2018

 

45

 

Payments and other adjustments

 

(58

)

Accrued balance at September 30, 2018

 

$

55

 

 

15


Table of Contents

 

Abbott Laboratories and Subsidiaries

Notes to the Condensed Consolidated Financial Statements

September 30, 2018

(Unaudited)

 

From 2014 to 2018, Abbott management approved plans to streamline operations in order to reduce costs and improve efficiencies in various Abbott businesses including the nutritional, established pharmaceuticals and vascular businesses.  In the first nine months of 2018, charges of $18 million were recognized, of which $8 million is recorded in Cost of products sold, $1 million is recorded in Research and development and $9 million as Selling, general and administrative expense.  The following summarizes the activity for the first nine months of 2018 related to these restructuring actions and the status of the related accrual as of September 30, 2018:

 

(in millions)

 

 

 

Accrued balance at December 31, 2017

 

$

141

 

Restructuring charges recorded in 2018

 

18

 

Payments and other adjustments

 

(72

)

Accrued balance at September 30, 2018

 

$

87

 

 

Note 11 — Incentive Stock Programs

 

In the first nine months of 2018, Abbott granted 5,760,221 stock options, 871,331 restricted stock awards and 7,995,581 restricted stock units under its incentive stock programs.  At September 30, 2018, approximately 144 million shares were reserved for future grants.  Information regarding the number of options outstanding and exercisable at September 30, 2018 is as follows:

 

 

 

Outstanding

 

Exercisable

 

Number of shares

 

33,984,922

 

21,496,161

 

Weighted average remaining life (years)

 

6.5

 

5.5

 

Weighted average exercise price

 

$

41.88

 

$

38.04

 

Aggregate intrinsic value (in millions)

 

$

1,070

 

$

759

 

 

The total unrecognized share-based compensation cost at September 30, 2018 amounted to approximately $439 million which is expected to be recognized over the next three years.

 

Note 12 — Debt and Lines of Credit

 

On January 5, 2018, Abbott paid off its $2.8 billion 5-year term loan and the remaining $1.150 billion balance under its revolving credit agreement.

 

On February 16, 2018, the board of directors authorized the early redemption of up to $5 billion of outstanding long-term notes.  Redemptions under this authorization include the following:

 

·                  $0.947 billion principal amount of its 5.125% Notes due 2019 — redeemed on March 22, 2018

·                  $1.055 billion of the $2.850 billion principal amount of its 2.35% Notes due 2019 — redeemed on March 22, 2018

·                  $1.300 billion of the $1.795 billion outstanding principal amount of its 2.35% Notes due 2019 — redeemed on June 22, 2018

·                  $0.495 billion outstanding principal amount of its 2.35% Notes due 2019 — redeemed on September 28, 2018

 

$1.2 billion of the $5 billion authorization remains available.  Abbott incurred a net charge of $14 million related to the March 22, 2018 early repayment of debt.

 

On September 17, 2018, Abbott repaid upon maturity the $500 million aggregate principal amount outstanding of the 2.00% Senior Notes due 2018.

 

On September 27, 2018, Abbott’s wholly owned subsidiary, Abbott Ireland Financing DAC, completed a euro debt offering of €3.420 billion of long-term debt consisting of €1.140 billion of non-interest bearing Senior Notes due 2020 at 99.727% of par value; €1.140 billion of 0.875% Senior Notes due 2023 at 99.912% of par value; and €1.140 billion of 1.5% Senior Notes due 2026 at 99.723% of par value.  The proceeds equated to approximately $4 billion. The notes are guaranteed by Abbott.

 

On October 28, 2018, Abbott redeemed $750 million principal amount of its 2.00% Notes due 2020; $597 million principal amount of its 4.125% Notes due 2020; $900 million principal amount of its 3.25% Notes due 2023; $450 million principal amount of its 3.4% Notes due 2023; and $1.300 billion principal amount of its 3.75% Notes due 2026.  These amounts are in addition to the $5 billion authorization discussed above.  Abbott incurred a net charge of $67 million in the third quarter of 2018 related to the early repayment of this debt.

 

16


Table of Contents

 

Abbott Laboratories and Subsidiaries

Notes to the Condensed Consolidated Financial Statements

September 30, 2018

(Unaudited)

 

Note 13 — 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 $3.6 billion at September 30, 2018 and $3.3 billion at December 31, 2017 are designated as cash flow hedges of the variability of the cash flows due to changes in foreign exchange rates and are recorded at fair value.  Accumulated gains and losses as of September 30, 2018 will be included in Cost of products sold at the time the products are sold, generally through the next twelve to eighteen months.  The amount of hedge ineffectiveness was not significant in 2018 and 2017.

 

Abbott enters into foreign currency forward exchange contracts to manage currency exposures for foreign currency denominated third-party trade payables and receivables, and for intercompany loans and trade accounts payable where the receivable or payable is denominated in a currency other than the functional currency of the entity.  For intercompany loans, the contracts require Abbott to sell or buy foreign currencies, primarily European currencies, in exchange for primarily U.S. dollars and other European currencies.  For intercompany and trade payables and receivables, the currency exposures are primarily the U.S. dollar and European currencies.  At September 30, 2018 and December 31, 2017, Abbott held the gross notional amount of $15.6 billion and $20.1 billion, respectively, of such foreign currency forward exchange contracts.

 

Abbott is a party to interest rate hedge contracts totaling approximately $4.0 billion at September 30, 2018 and December 31, 2017 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 2018 and 2017.

 

The following table summarizes the amounts and location of certain derivative financial instruments as of September 30, 2018 and December 31, 2017:

 

 

 

Fair Value - Assets

 

Fair Value - Liabilities

 

(in millions)

 

Sept. 30,
2018

 

Dec. 31,
2017

 

Balance Sheet Caption

 

Sept. 30,
2018

 

Dec. 31,
2017

 

Balance Sheet Caption

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest rate swaps designated as fair value hedges

 

$

 

$

 

Deferred income taxes and other assets

 

$

272

 

$

93

 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Foreign currency forward exchange contracts:

 

 

 

 

 

 

 

 

 

 

 

 

 

Hedging instruments

 

61

 

21

 

Prepaid expenses and other receivables

 

19

 

106

 

Other accrued liabilities

 

Others not designated as hedges

 

69

 

117

 

Prepaid expenses and other receivables

 

77

 

99

 

Other accrued liabilities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

$

130

 

$

138

 

 

 

$

368

 

$

298

 

 

 

 

17


Table of Contents

 

Abbott Laboratories and Subsidiaries

Notes to the Condensed Consolidated Financial Statements

September 30, 2018

(Unaudited)

 

The following table summarizes the activity for foreign currency forward exchange contracts designated as cash flow hedges, debt designated as a hedge of net investment in a foreign subsidiary and certain other derivative financial instruments, as well as the amounts and location of income (expense) and gain (loss) reclassified into income for the three months and nine months ended September 30, 2018 and 2017.  The amount of hedge ineffectiveness was not significant in 2018 and 2017 for these hedges.

 

 

 

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

 

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

 

 

 

 

 

Three Months
Ended Sept. 30

 

Nine Months
Ended Sept. 30

 

Three Months
Ended Sept. 30

 

Nine Months
Ended Sept. 30

 

 

 

(in millions)

 

2018

 

2017

 

2018

 

2017

 

2018

 

2017

 

2018

 

2017

 

Income Statement
Caption

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Foreign currency forward exchange contracts designated as cash flow hedges

 

$

18

 

$

(57

)

$

45

 

$

(202

)

$

(37

)

$

(7

)

$

(120

)

$

(14

)

Cost of products sold

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

 

 

 

 

(25

)

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

 

(42

)

(1

)

(179

)

13

 

Interest expense

 

 

Losses of $10 million and gains of $26 million were recognized in the three months ended September 30, 2018 and 2017, respectively, related to foreign currency forward exchange contracts not designated as a hedge.  Losses of $60 million and losses of $16 million were recognized in the nine months ended September 30, 2018 and 2017, respectively, related to foreign currency forward exchange contracts not designated as a hedge.  These amounts are reported in the Condensed Consolidated Statement of Earnings on the Net foreign exchange (gain) loss line.

 

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

 

The carrying values and fair values of certain financial instruments as of September 30, 2018 and December 31, 2017 are shown in the following table.  The carrying values of all other financial instruments approximate their estimated fair values.  The counterparties to financial instruments consist of select major international financial institutions.  Abbott does not expect any losses from nonperformance by these counterparties.

 

 

 

September 30, 2018

 

December 31, 2017

 

(in millions)

 

Carrying
Value

 

Fair
Value

 

Carrying
Value

 

Fair
Value

 

 

 

 

 

 

 

 

 

 

 

Investment Securities:

 

 

 

 

 

 

 

 

 

Equity securities

 

$

934

 

$

934

 

$

797

 

$

797

 

Other

 

37

 

37

 

86

 

86

 

Total Long-term Debt

 

(23,347

)

(24,013

)

(27,718

)

(29,018

)

Foreign Currency Forward Exchange Contracts:

 

 

 

 

 

 

 

 

 

Receivable position

 

130

 

130

 

138

 

138

 

(Payable) position

 

(96

)

(96

)

(205

)

(205

)

Interest Rate Hedge Contracts:

 

 

 

 

 

 

 

 

 

(Payable) position

 

(272

)

(272

)

(93

)

(93

)

 

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

 

18


Table of Contents

 

Abbott Laboratories and Subsidiaries

Notes to the Condensed Consolidated Financial Statements

September 30, 2018

(Unaudited)

 

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

 

 

 

 

 

Basis of Fair Value Measurement

 

(in millions)

 

Outstanding
Balances

 

Quoted
Prices in
Active
Markets

 

Significant
Other
Observable
Inputs

 

Significant
Unobservable
Inputs

 

September 30, 2018:

 

 

 

 

 

 

 

 

 

Equity securities

 

$

363

 

$

363

 

$

 

$

 

Foreign currency forward exchange contracts

 

130

 

 

130

 

 

Total Assets

 

$

493

 

$

363

 

$

130

 

$

 

 

 

 

 

 

 

 

 

 

 

Fair value of hedged long-term debt

 

$

3,730

 

$

 

$

3,730

 

$

 

Interest rate swap derivative financial instruments

 

272

 

 

272

 

 

Foreign currency forward exchange contracts

 

96

 

 

96

 

 

Contingent consideration related to business combinations

 

71

 

 

 

71

 

Total Liabilities

 

$

4,169

 

$

 

$

4,098

 

$

71

 

 

 

 

 

 

 

 

 

 

 

December 31, 2017:

 

 

 

 

 

 

 

 

 

Equity securities

 

$

374

 

$

374

 

$

 

$

 

Foreign currency forward exchange contracts

 

138

 

 

138

 

 

Total Assets

 

$

512

 

$

374

 

$

138

 

$

 

 

 

 

 

 

 

 

 

 

 

Fair value of hedged long-term debt

 

$

3,898

 

$

 

$

3,898

 

$

 

Interest rate swap derivative financial instruments

 

93

 

 

93

 

 

Foreign currency forward exchange contracts

 

205

 

 

205

 

 

Contingent consideration related to business combinations

 

120

 

 

 

120

 

Total Liabilities

 

$

4,316

 

$

 

$

4,196

 

$

120

 

 

The fair value of debt was determined based on the face value of the debt adjusted for the fair value of the interest rate swaps, which is based on a discounted cash flow analysis.  The fair value of foreign currency forward exchange contracts is determined using a market approach, which utilizes values for comparable derivative instruments.  The fair value of the contingent consideration was determined based on an independent appraisal adjusted for the time value of money and other changes in fair value.

 

Note 14 — Litigation and Environmental Matters

 

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

 

Abbott is involved in various claims and legal proceedings, and Abbott estimates the range of possible loss for its legal proceedings and environmental exposures to be from approximately $125 million to $165 million.  The recorded accrual balance at September 30, 2018 for these proceedings and exposures was approximately $145 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.

 

19


Table of Contents

 

Abbott Laboratories and Subsidiaries

Notes to the Condensed Consolidated Financial Statements

September 30, 2018

(Unaudited)

 

Note 15 — Post-Employment Benefits

 

Retirement plans consist of defined benefit, defined contribution, and medical and dental plans.  Net cost recognized in continuing operations for the three months and nine months ended September 30 for Abbott’s major defined benefit plans and post-employment medical and dental benefit plans is as follows:

 

 

 

Defined Benefit Plans

 

Medical and Dental Plans

 

 

 

Three Months

 

Nine Months

 

Three Months

 

Nine Months

 

 

 

Ended September 30

 

Ended September 30

 

Ended September 30

 

Ended September 30

 

(in millions)

 

2018

 

2017

 

2018

 

2017

 

2018

 

2017

 

2018

 

2017

 

Service cost - benefits earned during the period

 

$

76

 

$

71

 

$

221

 

$

213

 

$

7

 

$

6

 

$

20

 

$

19

 

Interest cost on projected benefit obligations

 

77

 

72

 

232

 

215

 

12

 

12

 

36

 

34

 

Expected return on plan assets

 

(169

)

(154

)

(511

)

(459

)

(9

)

(9

)

(25

)

(25

)

Net amortization of:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Actuarial loss, net

 

51

 

41

 

154

 

123

 

8

 

6

 

25

 

18

 

Prior service cost (credit)

 

 

 

1

 

 

(11

)

(11

)

(34

)

(34

)

Net cost - continuing operations

 

$

35

 

$

30

 

$

97

 

$

92

 

$

7

 

$

4

 

$

22

 

$

12

 

 

In the first quarter of 2018, Abbott adopted ASU 2017-07 which requires all components of pension and other postretirement benefit expense except service cost to be presented outside any subtotal of income from operations.  These amounts are now classified as non-operating (income) loss.  Abbott’s Condensed Consolidated Statement of Earnings was retrospectively adjusted, resulting in the reclassification of approximately $40 million and $120 million of income from the Operating earnings line to the Other (income) expense, net line in the third quarter and first nine months of 2017, respectively.

 

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

 

Abbott funds its domestic defined benefit plans according to IRS funding limitations.  International pension plans are funded according to similar regulations.  In the first nine months of 2018 and 2017, $71 million and $335 million, respectively, were contributed to defined benefit plans and $11 million was contributed to the post-employment medical and dental benefit plans in each year.

 

Note 16 — Taxes on Earnings

 

Taxes on earnings from continuing operations reflect the estimated annual effective rates and include charges for interest and penalties.  In the first nine months of 2018, taxes on earnings from continuing operations include approximately $80 million in excess tax benefits associated with share-based compensation.  Earnings from discontinued operations, net of tax, in the first nine months of 2018 reflect the recognition of $40 million of net tax benefits primarily as a result of the resolution of various tax positions related to prior years which decreased the gross amount of unrecognized tax benefits by $47 million.  In the first nine months of 2017, taxes on earnings from continuing operations include $435 million of tax expense related to the gain on the sale of the AMO business, which is taxed at a discrete tax rate.  Earnings from discontinued operations, net of tax, of $88 million for the first nine months of 2017 primarily reflects the recognition of net tax benefits as a result of the resolution of various tax positions related to prior years.

 

Tax authorities in various jurisdictions regularly review Abbott’s income tax filings.  Abbott believes that it is reasonably possible that the recorded amount of gross unrecognized tax benefits may decrease between $500 million and $700 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 2013 are settled except for the federal income tax returns of the former Alere consolidated group which are settled through 2014.

 

The Tax Cuts and Jobs Act (“TCJA”) was enacted in the U.S. on December 22, 2017.  The TCJA reduces the U.S. federal corporate tax rate from 35% to 21%, requires companies to pay a one-time transition tax on earnings of certain foreign subsidiaries that were previously tax deferred and creates new taxes on certain foreign sourced earnings.

 

20


Table of Contents

 

Abbott Laboratories and Subsidiaries

Notes to the Condensed Consolidated Financial Statements

September 30, 2018

(Unaudited)

 

In the fourth quarter of 2017, Abbott recorded an estimate of net tax expense of $1.46 billion for the impact of the TCJA, which was included in Taxes on Earnings from Continuing Operations in the Consolidated Statement of Earnings.  The estimate was provisional and included a charge of approximately $2.89 billion for the transition tax, partially offset by a net benefit of approximately $1.42 billion for the remeasurement of deferred tax assets and liabilities and a net benefit of approximately $10 million related to certain other impacts of the TCJA.

 

In the first nine months of 2018, Abbott recorded a $53 million adjustment to the provisional transition tax liability for revisions to previously recorded federal estimates and associated effects related to state tax.  This adjustment increases the estimate of net tax expense for the impact of TCJA to $1.513 billion.

 

Given the significant complexity of the TCJA, Abbott will continue to evaluate and analyze the impact of this legislation.  The $1.513 billion estimate is provisional and is based on Abbott’s latest analysis of the TCJA and may be materially adjusted in future periods due to among other things, additional analysis performed by Abbott and additional guidance that may be issued by the U.S. Department of Treasury, the Securities and Exchange Commission, or the Financial Accounting Standards Board.

 

Note 17 — Segment Information

 

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

 

Abbott’s reportable segments are as follows:

 

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

 

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

 

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

 

Cardiovascular and Neuromodulation Products — Worldwide sales of cardiac rhythm management, electrophysiology, heart failure, vascular, structural heart and neuromodulation products.  For segment reporting purposes, the Cardiac Arrhythmias & Heart Failure, Vascular, Neuromodulation and Structural Heart divisions are aggregated and reported as the Cardiovascular and Neuromodulation segment.

 

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

 

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

 

21


Table of Contents

 

Abbott Laboratories and Subsidiaries

Notes to the Condensed Consolidated Financial Statements

September 30, 2018

(Unaudited)

 

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

 

 

 

Net Sales to External Customers

 

Operating Earnings

 

 

 

Three Months

 

Nine Months

 

Three Months

 

Nine Months

 

 

 

Ended September 30

 

Ended September 30

 

Ended September 30

 

Ended September 30

 

(in millions)

 

2018

 

2017

 

2018

 

2017

 

2018

 

2017

 

2018

 

2017

 

Established Pharmaceutical Products

 

$

1,159

 

$

1,171

 

$

3,332

 

$

3,142

 

$

289

 

$

271

 

$

664

 

$

591

 

Nutritional Products

 

1,838

 

1,768

 

5,452

 

5,141

 

435

 

403

 

1,224

 

1,146

 

Diagnostic Products

 

1,824

 

1,279

 

5,534

 

3,710

 

443

 

353

 

1,375

 

975

 

Cardiovascular and Neuromodulation Products

 

2,303

 

2,224

 

7,047

 

6,587

 

730

 

682

 

2,215

 

1,990