ABBOTT LABORATORIES - Quarter Report: 2017 September (Form 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, 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

 

 

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.

 

 

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, 2017, Abbott Laboratories had 1,740,600,687 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	21
Item 3. Quantitative and Qualitative Disclosures about Market Risk	30
Item 4. Controls and Procedures	30
Part II - Other Information
Item 1. Legal Proceedings	30
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds	31
Item 6. Exhibits	31
Signature	33

 

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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
		2017			2016			2017			2016
Net sales		$	6,829		$	5,302		$	19,801		$	15,520
Cost of products sold, excluding amortization of intangible assets		2,857			2,285			9,074			6,712
Amortization of intangible assets		501			140			1,415			429
Research and development		562			352			1,622			1,079
Selling, general and administrative		2,099			1,628			6,655			5,063
Total operating cost and expenses		6,019			4,405			18,766			13,283
Operating earnings		810			897			1,035			2,237
Interest expense		218			117			658			278
Interest (income)		(36		)	(22		)	(89		)	(75		)
Net foreign exchange loss (gain)		(6		)	9			(34		)	497
Other expense (income), net		8			972			(1,157		)	999
Earnings (loss) from continuing operations before taxes		626			(179		)	1,657			538
Taxes on earnings (loss) from continuing operations		65			178			440			240
Earnings (loss) from continuing operations		561			(357		)	1,217			298
Earnings from discontinued operations, net of tax		42			28			88			288
Gain on sale of discontinued operations, net of tax		—			—			—			16
Net earnings from discontinued operations, net of tax		42			28			88			304
Net Earnings (Loss)		$	603		$	(329	)	$	1,305		$	602
Basic Earnings (Loss) Per Common Share —
Continuing operations		$	0.32		$	(0.24	)	$	0.70		$	0.20
Discontinued operations		0.02			0.02			0.05			0.21
Net earnings (loss)		$	0.34		$	(0.22	)	$	0.75		$	0.41
Diluted Earnings (Loss) Per Common Share —
Continuing operations		$	0.32		$	(0.24	)	$	0.69		$	0.20
Discontinued operations		0.02			0.02			0.05			0.20
Net earnings (loss)		$	0.34		$	(0.22	)	$	0.74		$	0.40
Cash Dividends Declared Per Common Share		$	0.265		$	0.26		$	0.795		$	0.78
Average Number of Common Shares Outstanding Used for Basic Earnings Per Common Share		1,743,757			1,476,366			1,737,310			1,476,351
Dilutive Common Stock Options		10,399			—			8,866			6,329
Average Number of Common Shares Outstanding Plus Dilutive Common Stock Options		1,754,156			1,476,366			1,746,176			1,482,680
Outstanding Common Stock Options Having No Dilutive Effect		282			12,103			282			5,445

 

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

 

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Abbott Laboratories and Subsidiaries

Condensed Consolidated Statement of Comprehensive Income

(Unaudited)

(dollars in millions)

 

		Three Months Ended						Nine Months Ended
		September 30						September 30
		2017			2016			2017			2016
Net Earnings (Loss)		$	603		$	(329	)	$	1,305		$	602
Foreign currency translation gain adjustments		285			89			1,106			406
Net actuarial gains (losses) and amortization of net actuarial (losses) and prior service (cost) and credits, net of taxes of $11 and $34 in 2017 and $8 and $5 in 2016		23			15			86			(14		)
Unrealized gains (losses) on marketable equity securities, net of taxes of $2 and $62 in 2017 and $(28) and $(28) in 2016		(136		)	613			(54		)	(143		)
Net (losses) for derivative instruments designated as cash flow hedges and other, net of taxes of $(10) and $(49) in 2017 and $(7) and $(31) in 2016		(38		)	(27		)	(140		)	(124		)
Other comprehensive income		134			690			998			125
Comprehensive Income		$	737		$	361		$	2,303		$	727

 

						September 30, 2017			December 31, 2016
Supplemental Accumulated Other Comprehensive Income (Loss) Information, net of tax:
Cumulative foreign currency translation (loss) adjustments						$	(3,711	)	$	(4,959	)
Net actuarial (losses) and prior service cost and credits						(2,192		)	(2,284		)
Cumulative unrealized gains (losses) on marketable equity securities						(123		)	(69		)
Cumulative (losses) gains on derivative instruments designated as cash flow hedges and other						(90		)	49
Accumulated other comprehensive income (loss)						$	(6,116	)	$	(7,263	)

 

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

 

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Abbott Laboratories and Subsidiaries

Condensed Consolidated Balance Sheet

(Unaudited)

(dollars in millions)

 

		September 30, 2017			December 31, 2016
Assets
Current Assets:
Cash and cash equivalents		$	11,012		$	18,620
Short-term investments		187			155
Trade receivables, less allowances of $279 in 2017 and $250 in 2016		4,800			3,248
Inventories:
Finished products		2,273			1,624
Work in process		456			294
Materials		754			516
Total inventories		3,483			2,434
Prepaid expenses and other receivables		1,895			1,806
Current assets held for disposition		—			513
Total Current Assets		21,377			26,776
Investments		1,386			2,947
Property and equipment, at cost		14,698			12,366
Less: accumulated depreciation and amortization		7,479			6,661
Net property and equipment		7,219			5,705
Intangible assets, net of amortization		18,578			4,539
Goodwill		22,066			7,683
Deferred income taxes and other assets		1,565			2,263
Non-current assets held for disposition		57			2,753
		$	72,248		$	52,666
Liabilities and Shareholders’ Investment
Current Liabilities:
Short-term borrowings		$	211		$	1,322
Trade accounts payable		1,858			1,178
Salaries, wages and commissions		1,103			752
Other accrued liabilities		3,617			2,581
Dividends payable		462			391
Income taxes payable		180			188
Current portion of long-term debt		504			3
Current liabilities held for disposition		—			245
Total Current Liabilities		7,935			6,660
Long-term debt		23,310			20,681
Post-employment obligations, deferred income taxes and other long-term liabilities		8,785			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: 1,964,324,771; 2016: 1,707,475,455		23,118			13,027
Common shares held in treasury, at cost — Shares: 2017: 223,724,084; 2016: 234,606,250		(10,290		)	(10,791		)
Earnings employed in the business		25,320			25,565
Accumulated other comprehensive income (loss)		(6,116		)	(7,263		)
Total Abbott Shareholders’ Investment		32,032			20,538
Noncontrolling Interests in Subsidiaries		186			179
Total Shareholders’ Investment		32,218			20,717
		$	72,248		$	52,666

 

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

 

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Abbott Laboratories and Subsidiaries

Condensed Consolidated Statement of Cash Flows

(Unaudited)

(dollars in millions)

 

		Nine Months Ended September 30
		2017			2016
Cash Flow From (Used in) Operating Activities:
Net earnings		$	1,305		$	602
Adjustments to reconcile net earnings to net cash from operating activities -
Depreciation		763			605
Amortization of intangible assets		1,415			429
Share-based compensation		338			263
Impact of currency devaluation		—			481
Amortization of inventory step-up		840			—
Gain on sale of businesses		(1,163		)	(25		)
Mylan N.V. equity investment adjustment		—			947
Trade receivables		(169		)	(116		)
Inventories		39			(152		)
Other, net		562			(1,001		)
Net Cash From Operating Activities		3,930			2,033
Cash Flow From (Used in) Investing Activities:
Acquisitions of property and equipment		(790		)	(802		)
Acquisitions of businesses and technologies, net of cash acquired		(13,027		)	(73		)
Proceeds from business dispositions		5,442			25
Proceeds from the sale of Mylan N.V. shares		1,977			—
Sales (Purchases) of other investment securities, net		(98		)	(982		)
Other		30			34
Net Cash (Used in) Investing Activities		(6,466		)	(1,798		)
Cash Flow From (Used in) Financing Activities:
Net (repayments of) short-term debt and other		(1,424		)	(682		)
Repayments of long-term debt		(2,508		)	(11		)
Payment of debt issuance costs		(8		)	(170		)
Payment of contingent consideration		(13		)	(25		)
Purchases of common shares		(106		)	(522		)
Proceeds from stock options exercised		275			206
Dividends paid		(1,385		)	(1,153		)
Net Cash (Used in) Financing Activities		(5,169		)	(2,357		)
Effect of exchange rate changes on cash and cash equivalents		97			(379		)
Net Decrease in Cash and Cash Equivalents		(7,608		)	(2,501		)
Cash and Cash Equivalents, Beginning of Year		18,620			5,001
Cash and Cash Equivalents, End of Period		$	11,012		$	2,500

 

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

 

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Abbott Laboratories and Subsidiaries

 

Notes to the Condensed Consolidated Financial Statements

 

September 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 third quarter and first nine months of 2017 were $29 million and $92 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. included voting and other restrictions that prevented 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 the first nine months of 2017, Abbott sold 51 million ordinary shares of Mylan N.V. and received $1.977 billion in proceeds.  Abbott recorded an immaterial pre-tax gain in the first nine 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 3.4%.

 

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 $88 million and $288 million in the first nine months of 2017 and 2016, 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.

 

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Abbott Laboratories and Subsidiaries

 

Notes to the Condensed Consolidated Financial Statements — (Continued)

 

September 30, 2017

 

(Unaudited)

 

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 $1.163 billion including working capital adjustments, which was reported in the Other expense (income), net line of 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 to the date of sale continued to be included in Earnings (loss) from continuing operations as they did not qualify for reporting as discontinued operations. For the three months ended September 30, 2017 and 2016, the AMO earnings before taxes included in Abbott’s consolidated earnings were nil and $2 million, respectively. For the first nine months ended September 30, 2017 and 2016, the AMO losses before taxes included in Abbott’s consolidated earnings were $18 million and $42 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 (loss) from continuing operations allocated to common shares for the three months ended September 30, 2017 and 2016 were $558 million and $(357) million, respectively, and for the nine months ended September 30, 2017 and 2016 were $1.211 billion and $297 million, respectively.  Net earnings (loss) allocated to common shares for the three months ended September 30, 2017 and 2016 were $601 million and $(329) million, respectively, and for the nine months ended September 30, 2017 and 2016 were $1.299 billion and $600 million, respectively.

 

On September 30, 2016, Abbott recorded expense of $947 million to adjust its holding of Mylan N.V. ordinary shares due to a decline in the fair value of the securities which was considered by Abbott to be other than temporary. The adjustment reflected Mylan N.V.’s share price as of September 30, 2016 and was included in the Other expense (income), net line of the Condensed Consolidated Statement of Earnings for 2016.

 

The Other, net line in Net cash from operating activities in the Condensed Consolidated Statement of Cash Flows for the first nine months of 2017 and 2016 includes the effects of contributions to defined benefit plans of $335 million and $540 million, respectively, and to the post-employment medical and dental benefit plans of $11 million and $9 million, respectively. 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, which has not yet been paid, and is taxed at a discrete tax rate.  The first nine months of 2016 also includes the non-cash impact of approximately $539 million of net tax benefits primarily associated with the resolution of various tax positions

 

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Abbott Laboratories and Subsidiaries

 

Notes to the Condensed Consolidated Financial Statements — (Continued)

 

September 30, 2017

 

(Unaudited)

 

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 nine months of 2016 reduced Abbott’s cash by approximately $410 million and is shown on the Effect of exchange rate changes on cash and cash equivalents line within the Condensed Consolidated Statement of Cash Flows.

 

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

 

On February 17, 2016, the Venezuelan government announced that the three-tier exchange rate system would be reduced to two rates renamed the DIPRO and DICOM rates.  The DIPRO rate is the official rate for food and medicine imports and was adjusted from 6.3 to 10 bolivars per U.S. dollar.  The DICOM rate is a floating market rate published daily by the Venezuelan central bank, which at the end of the first quarter of 2016 was approximately 263 bolivars per U.S. dollar.  As a result of decreasing government approvals to convert bolivars to U.S. dollars to pay for intercompany accounts, as well as the accelerating deterioration of economic conditions in the country, Abbott concluded that it was appropriate to move to the DICOM rate at the end of the first quarter of 2016.  As a result, Abbott recorded a foreign currency exchange loss of $481 million in the first nine months 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 September 30, 2017, Abbott’s Venezuelan operations represented less than 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 September 30, 2017 and December 31, 2016 are as follows:

 

Long-term Investments		September 30,			December 31,
(in millions)		2017			2016
Equity securities		$	1,300		$	2,906
Other		86			41
Total		$	1,386		$	2,947

 

As discussed in Note 2, in the first nine months of 2017, Abbott sold 51 million ordinary shares of Mylan N.V., thereby reducing Abbott’s investment in equity securities by approximately $2 billion.

 

Abbott’s equity securities as of September 30, 2017, include approximately $353 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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Abbott Laboratories and Subsidiaries

 

Notes to the Condensed Consolidated Financial Statements — (Continued)

 

September 30, 2017

 

(Unaudited)

 

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 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)		2017			2016			2017			2016			2017			2016			2017			2016
Balance at June 30		$	(3,996	)	$	(4,512	)	$	(2,215	)	$	(1,987	)	$	13		$	(691	)	$	(52	)	$	(33	)
Other comprehensive income (loss) before reclassifications		285			89			—			—			(136		)	(362		)	(44		)	(30		)
Amounts reclassified from accumulated other comprehensive income		—			—			23			15			—			975			6			3
Net current period comprehensive income (loss)		285			89			23			15			(136		)	613			(38		)	(27		)
Balance at September 30		$	(3,711	)	$	(4,423	)	$	(2,192	)	$	(1,972	)	$	(123	)	$	(78	)	$	(90	)	$	(60	)

 

		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)		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		1,106			406			—			(62		)	47			(1,118		)	(151		)	(77		)
Amounts reclassified from accumulated other comprehensive income		—			—			86			48			(101		)	975			11			(47		)
Net current period comprehensive income (loss)		1,106			406			86			(14		)	(54		)	(143		)	(140		)	(124		)
Balance at September 30		$	(3,711	)	$	(4,423	)	$	(2,192	)	$	(1,972	)	$	(123	)	$	(78	)	$	(90	)	$	(60	)

 

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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Abbott Laboratories and Subsidiaries

 

Notes to the Condensed Consolidated Financial Statements — (Continued)

 

September 30, 2017

 

(Unaudited)

 

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. 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		$	15.4
Goodwill, non-deductible		14.9
Acquired net tangible assets		3.1
Deferred income taxes recorded at acquisition		(4.5		)
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 $207 million, property and equipment of approximately $1.5 billion, and other long-term assets of $471 million. The acquired tangible liabilities consist of trade accounts payable and other current liabilities of approximately $1.1 billion and other non-current liabilities of approximately $850 million.

 

In the first nine months of 2017, consolidated Abbott results include $4.4 billion of sales and a pre-tax loss of approximately $1.2 billion related to the St. Jude Medical acquisition, including approximately $1.0 billion of intangible amortization and $840 million of inventory step-up amortization. The pre-tax loss 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 October 3, 2017, Abbott acquired Alere Inc. (Alere), a diagnostic device and service provider, for $51.00 per common share in cash, which equated to a purchase price of approximately $4.6 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 $2.96 billion of Alere’s debt was assumed and subsequently repaid.  The transaction 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. See Note 10 — Debt and Lines of Credit for further details regarding the debt utilized for the acquisition. As the acquisition of Alere was completed after September 30, 2017, Abbott’s consolidated financial statements do not include the financial condition or the operating results of Alere in any of the periods presented herein.

 

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Table of Contents

 

Abbott Laboratories and Subsidiaries

 

Notes to the Condensed Consolidated Financial Statements — (Continued)

 

September 30, 2017

 

(Unaudited)

 

The preliminary allocation of the fair value of the Alere acquisition is shown in the table below. 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		$	3.3
Goodwill, non-deductible		4.1
Acquired net tangible assets		1.0
Deferred income taxes recorded at acquisition		(0.5		)
Net debt		(2.6		)
Preferred stock		(0.7		)
Total preliminary allocation of fair value		$	4.6

 

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 $425 million, inventory of approximately $440 million, other current assets of $213 million, property and equipment of approximately $480 million, and other long-term assets of $147 million. The acquired tangible liabilities consist of trade accounts payable and other current liabilities of approximately $570 million and other non-current liabilities of approximately $160 million.

 

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 Corporation (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. 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.

 

If the acquisitions of St. Jude Medical and Alere had occurred at the beginning of 2016, unaudited pro forma consolidated net sales would have been approximately $21.6 billion and the unaudited pro forma consolidated net loss from continuing operations would have been approximately $875 million for the first nine months of 2016. This includes amortization of approximately $955 million of inventory step-up and $1.3 billion of intangibles related to St. Jude Medical and Alere. For the third quarter of 2016, unaudited pro forma consolidated net sales would have been approximately $7.3 billion and the unaudited pro forma consolidated net loss from continuing operations would have been approximately $490 million. This includes amortization of approximately $20 million of inventory step-up and $425 million of intangibles related to St. Jude Medical and Alere.

 

For the first nine months of 2017, unaudited pro forma consolidated net sales would have been approximately $21.3 billion and unaudited pro forma consolidated net earnings from continuing operations would have been approximately $1.6 billion, which includes $225 million of intangible amortization related to Alere. For the third quarter of 2017, unaudited pro forma consolidated net sales would have been approximately $7.3 billion and unaudited pro forma consolidated net earnings from continuing operations would have been approximately $515 million, which includes $75 million of intangible amortization related to Alere. The unaudited pro forma consolidated net earnings from continuing operations for the third quarter and first nine months of 2017 exclude inventory step-up amortization related to St. Jude Medical of approximately $20 million and $840 million, respectively, which was recorded in 2017 but included in the 2016 unaudited pro forma results noted in the paragraph above. 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 and Alere acquisitions 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.

 

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).  Payment of the offer price for such shares has been made in the fourth quarter of 2017.

 

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Abbott Laboratories and Subsidiaries

 

Notes to the Condensed Consolidated Financial Statements — (Continued)

 

September 30, 2017

 

(Unaudited)

 

Note 7 — Goodwill and Intangible Assets

 

The total amount of goodwill reported was $22.1 billion at September 30, 2017 and $7.7 billion at December 31, 2016. Goodwill increased by $14.9 billion during the first nine 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 $578 million in the first nine months of 2017. The amount reported at December 31, 2016 excludes goodwill reported in non-current assets held for disposition. In the first nine months of 2017, approximately $2.0 billion of goodwill was included as part of the net assets sold in the AMO divestiture. The amount of goodwill related to reportable segments at September 30, 2017 was $3.2 billion for the Established Pharmaceutical Products segment, $286 million for the Nutritional Products segment, $416 million for the Diagnostic Products segment, and $17.2 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 $22.4 billion as of September 30, 2017 and $10.4 billion as of December 31, 2016, and accumulated amortization was $7.5 billion as of September 30, 2017 and $6.2 billion as of December 31, 2016. The gross amount of amortizable intangible assets increased by $11.5 billion during the first nine months of 2017 due to the completion of the St. Jude Medical acquisition.  Foreign currency translation adjustments increased intangible assets by $157 million during the first nine 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 nine 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 $3.7 billion and $349 million as of September 30, 2017 and December 31, 2016, respectively. Indefinite-lived intangible assets increased by $3.9 billion due to the completion of the St. Jude Medical acquisition. In the first nine months of 2016, Abbott recorded an impairment of a $59 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 $1.8 billion in 2021. Amortizable intangible assets are amortized over 2 to 20 years (weighted average 11 years). These amounts do not include amortization expense associated with the intangible assets acquired as part of the Alere acquisition, which closed on October 3, 2017.

 

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 nine months of 2017, charges of approximately $162 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 nine months of 2017 related to these actions and the status of the related accrual as of September 30, 2017:

 

(in millions)
Liabilities assumed as part of business acquisition		$	20
Restructuring charges recorded in 2017		162
Payments and other adjustments		(112		)
Accrued balance at September 30, 2017		$	70

 

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 vascular, nutritional and established pharmaceuticals businesses. In the first nine months of 2017, charges of approximately $87 million were recognized, of which approximately $4 million is recorded in Cost of products sold, approximately $76 million is recorded in Research and development and approximately $7 million as Selling, general and administrative expense. The following summarizes the activity for the first nine months of 2017 related to these restructuring actions and the status of the related accrual as of September 30, 2017:

 

(in millions)
Accrued balance at December 31, 2016		$	66
Restructuring charges recorded in 2017		87
Payments and other adjustments		(27		)
Accrued balance at September 30, 2017		$	126

 

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Abbott Laboratories and Subsidiaries

 

Notes to the Condensed Consolidated Financial Statements — (Continued)

 

September 30, 2017

 

(Unaudited)

 

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 nine months of 2017, Abbott granted 4,985,970 stock options, 580,203 restricted stock awards and 7,001,737 restricted stock units under its incentive stock programs.  At September 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 September 30, 2017 is as follows:

 

		Outstanding			Exercisable
Number of shares		38,381,732			22,782,532
Weighted average remaining life (years)		5.8			4.5
Weighted average exercise price		$	36.36		$	34.34
Aggregate intrinsic value (in millions)		$	652		$	433

 

The total unrecognized share-based compensation cost at September 30, 2017 amounted to approximately $328 million which is expected to be recognized over the next three years.

 

Note 10 — Debt and Lines of Credit

 

In the first quarter 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 quarter 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 quarter of 2017.

 

During the first nine months of 2017, Abbott issued 364-day yen-denominated debt, of which $195 million was outstanding at September 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 did not need this bridge facility to finance the Alere acquisition. The fees associated with the bridge facilities were recognized in interest expense.

 

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Table of Contents

 

Abbott Laboratories and Subsidiaries

 

Notes to the Condensed Consolidated Financial Statements — (Continued)

 

September 30, 2017

 

(Unaudited)

 

On July 31, 2017, Abbott entered into a 5-year term loan agreement that allowed Abbott to borrow up to $2.8 billion on an unsecured basis for the acquisition of Alere.  On October 3, 2017, Abbott borrowed $2.8 billion under this term loan agreement to finance the acquisition of Alere, to repay certain indebtedness of Abbott and Alere, and to pay fees and expenses in connection with the acquisition.  Borrowings under the term loan will bear interest based on a Eurodollar rate, plus an applicable margin based on Abbott’s credit ratings.

 

On October 3, 2017 Abbott borrowed $1.7 billion of revolving loans under its unused lines of credit.  Proceeds from such borrowing were used to finance the acquisition of Alere, to repay certain indebtedness of Abbott and Alere, and to pay fees and expenses in connection with the acquisition.  These lines of credit are part of a 2014 revolving credit agreement that provides Abbott with the ability to borrow up to $5 billion on an unsecured basis.  Advances under the revolving credit agreement, including the $1.7 billion borrowing in October 2017, will mature and be payable on July 10, 2019.  The $1.7 billion borrowing will bear interest based on a Eurodollar rate, plus an applicable margin based on Abbott’s credit ratings.  Prior to October 3, 2017, no amounts were previously drawn under the revolving credit agreement.

 

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 $3.6 billion at September 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 September 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 September 30, 2017 and December 31, 2016, Abbott held the gross notional amount of $16.3 billion and $14.9 billion, respectively, of such foreign currency forward exchange contracts.

 

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 September 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.

 

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Table of Contents

 

Abbott Laboratories and Subsidiaries

 

Notes to the Condensed Consolidated Financial Statements — (Continued)

 

September 30, 2017

 

(Unaudited)

 

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

 

		Fair Value - Assets								Fair Value - Liabilities
(in millions)		Sept. 30, 2017			Dec. 31, 2016			Balance Sheet Caption		Sept. 30, 2017			Dec. 31, 2016			Balance Sheet Caption
Interest rate swaps designated as fair value hedges		$	—		$	8		Deferred income taxes and other assets		$	53		$	74		Post-employment obligations, deferred income taxes and other long-term liabilities
Foreign currency forward exchange contracts:
Hedging instruments		23			99			Prepaid expenses and other receivables		111			15			Other accrued liabilities
Others not designated as hedges		197			177			Prepaid expenses and other receivables		118			67			Other accrued liabilities
Debt designated as a hedge of net investment in a foreign subsidiary		—			—			n/a		—			454			Short-term borrowings
		$	220		$	284				$	282		$	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 nine months ended September 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 Sept. 30						Nine Months Ended Sept. 30						Three Months Ended Sept. 30						Nine Months Ended Sept. 30						Income Statement
(in millions)		2017			2016			2017			2016			2017			2016			2017			2016			Caption
Foreign currency forward exchange contracts designated as cash flow hedges		$	(57	)	$	(45	)	$	(202	)	$	(96	)	$	(7	)	$	5		$	(14	)	$	59		Cost of products sold
Debt designated as a hedge of net investment in a foreign subsidiary		—			(6		)	(25		)	(83		)	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			(1		)	(50		)	13			95			Interest expense

 

Gains of $26 million and losses of $5 million were recognized in the three months ended September 30, 2017 and 2016, respectively, related to foreign currency forward exchange contracts not designated as a hedge. Losses of $16 million and gains of $16 million were recognized in the nine months ended September 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.

 

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