ABBOTT LABORATORIES - Quarter Report: 2019 March (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 March 31, 2019

 

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

 

Securities Registered Pursuant to Section 12(b) of the Act:

 

 

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 every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 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 March 31, 2019, Abbott Laboratories had 1,764,181,262 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 Shareholders’ Investment	6
Condensed Consolidated Statement of Cash Flows	7
Notes to the Condensed Consolidated Financial Statements	8
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations	19
Item 4. Controls and Procedures	24
Part II - Other Information
Item 1. Legal Proceedings	24
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds	25
Item 6. Exhibits	26
Signature	27

 

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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 March 31
		2019			2018
Net sales		$	7,535		$	7,390
Cost of products sold, excluding amortization of intangible assets		3,160			3,067
Amortization of intangible assets		486			584
Research and development		672			589
Selling, general and administrative		2,478			2,542
Total operating cost and expenses		6,796			6,782
Operating earnings		739			608
Interest expense		171			227
Interest (income)		(23		)	(28		)
Net foreign exchange (gain) loss		6			(3		)
Net loss on extinguishment of debt		—			14
Other (income) expense, net		(47		)	(33		)
Earnings from continuing operations before tax		632			431
Tax expense (benefit) on earnings from continuing operations		(40		)	22
Earnings from continuing operations		672			409
Earnings from discontinued operations, net of tax		—			9
Net Earnings		$	672		$	418
Basic Earnings Per Common Share —
Continuing operations		$	0.38		$	0.23
Discontinued operations		—			0.01
Net earnings		$	0.38		$	0.24
Diluted Earnings Per Common Share —
Continuing operations		$	0.38		$	0.23
Discontinued operations		—			—
Net earnings		$	0.38		$	0.23
Average Number of Common Shares Outstanding Used for Basic Earnings Per Common Share		1,763,278			1,753,412
Dilutive Common Stock Options		13,295			11,866
Average Number of Common Shares Outstanding Plus Dilutive Common Stock Options		1,776,573			1,765,278
Outstanding Common Stock Options Having No Dilutive Effect		4,011			—

 

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 March 31
		2019			2018
Net Earnings		$	672		$	418
Foreign currency translation gain (loss) adjustments		122			333
Net actuarial gains (losses) and amortization of net actuarial (losses) and prior service (cost) and credits, net of taxes of $7 in 2019 and $17 in 2018		23			23
Net gains (losses) for derivative instruments designated as cash flow hedges, net of taxes of $(8) in 2019 and $(20) in 2018		(29		)	(32		)
Other comprehensive income		116			324
Comprehensive Income		$	788		$	742

 

		March 31,			December 31,
		2019			2018
Supplemental Accumulated Other Comprehensive Income (Loss) Information, net of tax:
Cumulative foreign currency translation (loss) adjustments		$	(4,790	)	$	(4,912	)
Net actuarial (losses) and prior service (cost) and credits		(2,703		)	(2,726		)
Cumulative gains (losses) on derivative instruments designated as cash flow hedges		23			52
Accumulated Other Comprehensive Income (Loss)		$	(7,470	)	$	(7,586	)

 

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)

 

		March 31, 2019			December 31, 2018
Assets
Current Assets:
Cash and cash equivalents		$	3,022		$	3,844
Short-term investments		239			242
Trade receivables, less allowances of $331 in 2019 and $314 in 2018		5,345			5,182
Inventories:
Finished products		2,641			2,407
Work in process		536			499
Materials		908			890
Total inventories		4,085			3,796
Prepaid expenses and other receivables		1,718			1,568
Total Current Assets		14,409			14,632
Investments		867			897
Property and equipment, at cost		15,905			15,706
Less: accumulated depreciation and amortization		8,279			8,143
Net property and equipment		7,626			7,563
Intangible assets, net of amortization		18,472			18,942
Goodwill		23,209			23,254
Deferred income taxes and other assets		3,027			1,885
		$	67,610		$	67,173
Liabilities and Shareholders’ Investment
Current Liabilities:
Short-term borrowings		$	201		$	200
Trade accounts payable		3,045			2,975
Salaries, wages and commissions		886			1,182
Other accrued liabilities		4,130			3,780
Dividends payable		566			563
Income taxes payable		277			305
Current portion of long-term debt		8			7
Total Current Liabilities		9,113			9,012
Long-term debt		18,845			19,359
Post-employment obligations, deferred income taxes and other long-term liabilities		8,523			8,080
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: 2019: 1,973,472,506; 2018: 1,971,189,465		23,461			23,512
Common shares held in treasury, at cost — Shares: 2019: 209,291,244; 2018: 215,570,043		(9,679		)	(9,962		)
Earnings employed in the business		24,613			24,560
Accumulated other comprehensive income (loss)		(7,470		)	(7,586		)
Total Abbott Shareholders’ Investment		30,925			30,524
Noncontrolling Interests in Subsidiaries		204			198
Total Shareholders’ Investment		31,129			30,722
		$	67,610		$	67,173

 

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 Shareholders’ Investment

(Unaudited)

(in millions except shares and per share data)

 

		Three Months Ended March 31
		2019			2018
Common Shares:
Balance at January 1
Shares: 2019: 1,971,189,465; 2018: 1,965,908,188		$	23,512		$	23,206
Issued under incentive stock programs
Shares: 2019: 2,283,041; 2018: 3,422,819		76			102
Share-based compensation		237			225
Issuance of restricted stock awards		(364		)	(310		)
Balance at March 31
Shares: 2019: 1,973,472,506; 2018: 1,969,331,007		$	23,461		$	23,223
Common Shares Held in Treasury:
Balance at January 1
Shares: 2019: 215,570,043; 2018: 222,305,719		$	(9,962	)	$	(10,225	)
Issued under incentive stock programs
Shares: 2019: 6,544,927; 2018: 6,402,695		303			292
Purchased
Shares: 2019: 266,128; 2018: 240,217		(20		)	(14		)
Balance at March 31
Shares: 2019: 209,291,244; 2018: 216,143,241		$	(9,679	)	$	(9,947	)
Earnings Employed in the Business:
Balance at January 1		$	24,560		$	23,978
Impact of adoption of new accounting standards		—			15
Net earnings		672			418
Cash dividends declared on common shares (per share — 2019: $0.32; 2018: $0.28)		(568		)	(493		)
Effect of common and treasury share transactions		(51		)	(62		)
Balance at March 31		$	24,613		$	23,856
Accumulated Other Comprehensive Income (Loss):
Balance at January 1		$	(7,586	)	$	(6,062	)
Impact of adoption of new accounting standard		—			5
Other comprehensive income (loss)		116			324
Balance at March 31		$	(7,470	)	$	(5,733	)
Noncontrolling Interests in Subsidiaries:
Balance at January 1		$	198		$	201
Noncontrolling Interests’ share of income, business combinations, net of distributions and share repurchases		6			1
Balance at March 31		$	204		$	202

 

The accompanying notes to 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)

 

		Three Months Ended March 31
		2019			2018
Cash Flow From (Used in) Operating Activities:
Net earnings		$	672		$	418
Adjustments to reconcile net earnings to net cash from operating activities -
Depreciation		267			268
Amortization of intangible assets		486			584
Share-based compensation		226			212
Amortization of inventory step-up		—			32
Trade receivables		(170		)	(53		)
Inventories		(286		)	(171		)
Other, net		(483		)	(182		)
Net Cash From Operating Activities		712			1,108
Cash Flow From (Used in) Investing Activities:
Acquisitions of property and equipment		(335		)	(275		)
Acquisitions of businesses and technologies, net of cash acquired		(78		)	(25		)
Sales (purchases) of other investment securities, net		2			(5		)
Other		15			67
Net Cash (Used in) Investing Activities		(396		)	(238		)
Cash Flow From (Used in) Financing Activities:
Net borrowings (repayments) of short-term debt and other		13			6
Repayments of long-term debt		(500		)	(5,979		)
Purchases of common shares		(217		)	(128		)
Proceeds from stock options exercised		127			137
Dividends paid		(565		)	(491		)
Net Cash (Used in) Financing Activities		(1,142		)	(6,455		)
Effect of exchange rate changes on cash and cash equivalents		4			35
Net Decrease in Cash and Cash Equivalents		(822		)	(5,550		)
Cash and Cash Equivalents, Beginning of Year		3,844			9,407
Cash and Cash Equivalents, End of Period		$	3,022		$	3,857

 

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

March 31, 2019

(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, 2018.  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 February 2016, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2016-02, Leases, which requires lessees to measure and recognize a lease asset and liability on the balance sheet for most leases, including operating leases.  Abbott adopted the new standard as of January 1, 2019 using the modified retrospective approach and applied the standard’s transition provisions as of January 1, 2019.  As a result, no changes were made to the December 31, 2018 Consolidated Balance Sheet. Abbott elected to apply the package of practical expedients related to transition. These practical expedients allowed Abbott to carry forward its historical assessments of whether any existing contracts are or contain leases, the lease classification for each lease existing at January 1, 2019, and whether any initial direct costs for such leases qualified for capitalization.

 

The new lease accounting standard does not have a material impact on the amounts reported in the Condensed Consolidated Statement of Earnings but does have a material impact on the amounts reported in the Condensed Consolidated Balance Sheet.  Adoption of the new standard resulted in the recording of approximately $850 million of new right of use (ROU) assets and additional liabilities for operating leases on the Condensed Consolidated Balance Sheet as of January 1, 2019.

 

Recent Accounting Standards Not Yet Adopted

 

In June 2016, the FASB issued ASU 2016-13, Financial Instruments — Credit Losses which changes the methodology to be used to measure credit losses for certain financial instruments and financial assets, including trade receivables. The new methodology requires the recognition of an allowance that reflects the current estimate of credit losses expected to be incurred over the life of the financial asset.  The new standard will be effective for Abbott at the beginning of 2020, with early adoption permitted. Abbott is currently assessing the impact of this new standard 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.  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.

 

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Abbott Laboratories and Subsidiaries

Notes to the Condensed Consolidated Financial Statements

March 31, 2019

(Unaudited)

 

The following table provides revenues by sales category:

 

		Three Months Ended March 31, 2019									Three Months Ended March 31, 2018
(in millions)		U.S.			Int’l			Total			U.S.			Int’l			Total
Established Pharmaceutical Products —
Key Emerging Markets		$	—		$	752		$	752		$	—		$	793		$	793
Other		—			240			240			—			251			251
Total		—			992			992			—			1,044			1,044
Nutritionals —
Pediatric Nutritionals		453			576			1,029			448			546			994
Adult Nutritionals		294			469			763			310			452			762
Total		747			1,045			1,792			758			998			1,756
Diagnostics —
Core Laboratory		249			812			1,061			228			791			1,019
Molecular		40			68			108			39			79			118
Point of Care		109			26			135			110			31			141
Rapid Diagnostics		326			211			537			323			236			559
Total		724			1,117			1,841			700			1,137			1,837
Cardiovascular and Neuromodulation —
Rhythm Management		233			257			490			264			271			535
Electrophysiology		193			236			429			182			209			391
Heart Failure		143			41			184			114			39			153
Vascular		266			443			709			286			453			739
Structural Heart		136			188			324			109			184			293
Neuromodulation		152			41			193			168			44			212
Total		1,123			1,206			2,329			1,123			1,200			2,323
Other		160			421			581			94			336			430
Total		$	2,754		$	4,781		$	7,535		$	2,675		$	4,715		$	7,390

 

Remaining Performance Obligations

 

As of March 31, 2019, the estimated revenue expected to be recognized in the future related to performance obligations that are unsatisfied (or partially unsatisfied) was approximately $3.0 billion in the Diagnostics segment and approximately $390 million in the Cardiovascular and Neuromodulation segment.  Abbott expects to recognize revenue on approximately 60 percent of these remaining performance obligations over the next 24 months, approximately 16 percent 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.

 

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.

 

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Abbott Laboratories and Subsidiaries

Notes to the Condensed Consolidated Financial Statements

March 31, 2019

(Unaudited)

 

Changes in the contract liabilities during the period are as follows:

 

(in millions)
Contract Liabilities
Balance at December 31, 2018		$	259
Unearned revenue from cash received during the period		109
Revenue recognized that was included in contract liability balance at beginning of period		(86		)
Balance at March 31, 2019		$	282

 

Note 4 — Supplemental Financial Information

 

Shares of unvested restricted stock that contain non-forfeitable rights to dividends are treated as participating securities and are included in the computation of earnings per share under the two-class method.  Under the two-class method, net earnings are allocated between common shares and participating securities.  Earnings from Continuing Operations allocated to common shares for the three months ended March 31, 2019 and 2018 were $668 million and $406 million, respectively.  Net earnings allocated to common shares for the three months ended March 31, 2019 and 2018 were $668 million and $415 million, respectively.

 

Other, net in Net cash from operating activities in the Condensed Consolidated Statement of Cash Flows for the first three months of 2019 includes $313 million of pension contributions and the payment of cash taxes of approximately $185 million.  The first three months of 2018 includes the payment of cash taxes of approximately $220 million.

 

The components of long-term investments as of March 31, 2019 and December 31, 2018 are as follows:

 

Long-term Investments		March 31,			December 31,
(in millions)		2019			2018
Equity securities		$	832		$	856
Other		35			41
Total		$	867		$	897

 

Abbott’s equity securities as of March 31, 2019, include approximately $328 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 March 31, 2019 with a carrying value of approximately $325 million that are accounted for under the equity method of accounting and other equity investments with a carrying value of approximately $170 million that do not have a readily determinable fair value.  The $170 million carrying value includes cumulative unrealized gains of approximately $50 million.

 

In the first quarter of 2019, in conjunction with the acquisition of Cephea Valve Technologies, Inc., Abbott acquired a research & development (R&D) asset valued at $102 million, which was immediately expensed. The $102 million of expense was recorded in the R&D line of Abbott’s Condensed Consolidated Statement of Earnings.

 

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Abbott Laboratories and Subsidiaries

Notes to the Condensed Consolidated Financial Statements

March 31, 2019

(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 March 31
		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)		2019			2018			2019			2018			2019			2018			2019			2018
Balance at December 31		$	(4,912	)	$	(3,452	)	$	(2,726	)	$	(2,521	)	$	—		$	(5	)	$	52		$	(84	)
Impact of adoption of new accounting standard		—			—			—			—			—			5			—			—
Other comprehensive income (loss) before reclassifications		122			333			(1		)	(10		)	—			—			(17		)	(52		)
Amounts reclassified from accumulated other comprehensive income		—			—			24			33			—			—			(12		)	20
Net current period comprehensive income (loss)		122			333			23			23			—			—			(29		)	(32		)
Balance at March 31		$	(4,790	)	$	(3,119	)	$	(2,703	)	$	(2,498	)	$	—		$	—		$	23		$	(116	)

 

Reclassified amounts for foreign currency translation are recorded in the Condensed Consolidated Statement of Earnings as Net foreign exchange (gain) loss; and amounts for cash flow hedges are recorded as Cost of products sold.  Net actuarial losses and prior service cost are included as a component of net periodic benefit costs; see Note 13 for additional details.

 

Note 6 — Goodwill and Intangible Assets

 

The total amount of goodwill reported was $23.2 billion at March 31, 2019 and $23.3 billion at December 31, 2018.  Foreign currency translation adjustments decreased goodwill by approximately $45 million in the first three months of 2019.  The amount of goodwill related to reportable segments at March 31, 2019 was $3.0 billion for the Established Pharmaceutical Products segment, $286 million for the Nutritional Products segment, $3.7 billion for the Diagnostic Products segment, and $15.2 billion for the Cardiovascular and Neuromodulation Products segment.  There was no reduction of goodwill relating to impairments in the first three months of 2019.

 

The gross amount of amortizable intangible assets, primarily product rights and technology was $25.7 billion as of March 31, 2019 and December 31, 2018, and accumulated amortization was $10.8 billion as of March 31, 2019 and $10.4 billion as of December 31, 2018.  Foreign currency translation adjustments increased intangible assets by $16 million in the first three months of 2019. Abbott’s estimated annual amortization expense for intangible assets is approximately $2.0 billion in 2019, $2.2 billion in 2020, $2.1 billion in 2021, $2.0 billion in 2022 and $2.0 billion in 2023.  Amortizable intangible assets are amortized over 2 to 20 years (weighted average 12 years).

 

Indefinite-lived intangible assets, which relate to in-process R&D acquired in a business combination, were approximately $3.6 billion as of March 31, 2019 and December 31, 2018.

 

Note 7 — Restructuring Plans

 

From 2017 to 2019, Abbott management approved restructuring plans as part of the integration of the acquisitions of St. Jude Medical into the cardiovascular and neuromodulation segment, and Alere Inc. (Alere) into the diagnostics segment, in order to leverage economies of scale and reduce costs. In the first three months of 2019, charges of $35 million were recognized, of which $16 million is recorded in Cost of products sold, $2 million is recorded in Research and development and $17 million as Selling, general and administrative expense.  The following summarizes the activity for the first three months of 2019 related to these actions and the status of the related accrual as of March 31, 2019:

 

(in millions)
Accrued balance at December 31, 2018		$	41
Restructuring charges recorded in 2019		35
Payments and other adjustments		(15		)
Accrued balance at March 31, 2019		$	61

 

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Abbott Laboratories and Subsidiaries

Notes to the Condensed Consolidated Financial Statements

March 31, 2019

(Unaudited)

 

From 2016 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.  The following summarizes the activity for the first three months of 2019 related to these restructuring actions and the status of the related accrual as of March 31, 2019:

 

(in millions)
Accrued balance at December 31, 2018		$	70
Payments and other adjustments		(8		)
Accrued balance at March 31, 2019		$	62

 

Note 8 — Incentive Stock Programs

 

In the first three months of 2019, Abbott granted 4,010,886 stock options, 663,273 restricted stock awards and 6,295,318 restricted stock units under its incentive stock programs.  At March 31, 2019, approximately 126 million shares were reserved for future grants.  Information regarding the number of options outstanding and exercisable at March 31, 2019 is as follows:

 

		Outstanding			Exercisable
Number of shares		33,426,839			24,138,209
Weighted average remaining life (years)		6.7			5.9
Weighted average exercise price		$	47.05		$	40.52
Aggregate intrinsic value (in millions)		$	1,099		$	952

 

The total unrecognized share-based compensation cost at March 31, 2019 amounted to approximately $663 million which is expected to be recognized over the next three years.

 

Note 9 — Debt and Lines of Credit

 

On February 24, 2019, Abbott redeemed the $500 million outstanding principal amount of its 2.80% Notes due 2020.

 

In February 2018, the board of directors had authorized the early redemption of up to $5 billion of outstanding long-term notes. After the repayment of the 2.80% Notes and other debt repayments that totaled $3.8 billion in 2018, approximately $700 million of the authorization remains available.

 

Note 10 — Leases

 

Leases where Abbott is the Lessee

 

Abbott has entered into operating leases as the lessee for office space, manufacturing facilities, R&D laboratories, warehouses, vehicles and equipment.  Finance leases are not significant.  Abbott’s operating leases generally have remaining lease terms of 1 year to 10 years. Some leases include options to extend beyond the original lease term, generally up to 10 years and some include options to terminate early. These options have been included in the determination of the lease liability when it is reasonably certain that the option will be exercised.

 

For all of its asset classes Abbott elected the practical expedient allowed under FASB ASC No. 842, “Leases” to account for each lease component (e.g., the right to use office space) and the associated non-lease components (e.g., maintenance services) as a single lease component. Abbott also elected the short-term lease accounting policy for all asset classes; therefore, Abbott is not recognizing a lease liability or ROU asset for any lease that, at the commencement date, has a lease term of 12 months or less and does not include an option to purchase the underlying asset that Abbott is reasonably certain to exercise.

 

As Abbott’s leases typically do not provide an implicit rate, the interest rate used to determine the present value of the payments under each lease typically reflects Abbott’s incremental borrowing rate based on information available at the lease commencement date.  Abbott’s incremental borrowing rates at January 1, 2019 were used for operating leases that commenced prior to January 1, 2019.

 

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Abbott Laboratories and Subsidiaries

Notes to the Condensed Consolidated Financial Statements

March 31, 2019

(Unaudited)

 

The following table provides information related to Abbott’s operating leases:

 

		Three Months Ended
(in millions)		March 31, 2019
Operating lease cost (a)		$	74
Cash paid for amounts included in the measurement of operating lease liabilities		$	63
ROU assets arising from obtaining new operating lease obligations		$	34
Weighted average remaining lease term — operating leases		8 years
Weighted average discount rate — operating leases		4.2		%

 

(a)         Includes short-term lease expense and variable lease costs, which were immaterial in the quarter.

 

Future minimum lease payments under non-cancellable operating leases as of March 31, 2019 were as follows:

 

(in millions)
2019		$	174
2020		191
2021		142
2022		111
2023		83
Thereafter		318
Total future minimum lease payments — undiscounted		1,019
Less: imputed interest		(168		)
Present value of lease liabilities		$	851

 

The following table summarizes the amounts and location of operating lease ROU assets and lease liabilities as of March 31, 2019:

 

(in millions)		March 31, 2019			Balance Sheet Caption
Operating Lease - ROU Asset		$	833		Deferred income taxes and other assets
Operating Lease Liability:
Current		$	196		Other accrued liabilities
Non-Current		655			Post-employment obligations, deferred income taxes and other long-term liabilities
Total Liability		$	851

 

Leases where Abbott is the Lessor

 

Certain assets, primarily Diagnostics instruments, are leased to customers under contractual arrangements that typically include an operating or sales-type lease as well as performance obligations for reagents and other consumables. Sales-type leases are not significant. Contract terms vary by customer and may include options to terminate the contract or options to extend the contract. Where instruments are provided under operating lease arrangements, some portion or the entire lease revenue may be variable and subject to subsequent non-lease component (e.g. reagent) sales. The allocation of revenue between the lease and non-lease components is based on stand-alone selling prices. Operating lease revenue represented less than 3 percent of Abbott’s total net sales in the first quarter of 2019.

 

Assets related to operating leases are reported within Net property and equipment on the Condensed Consolidated Balance Sheet.  The original cost and the net book value of such assets were $2.8 billion and $1.1 billion, respectively, as of March 31, 2019.

 

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Abbott Laboratories and Subsidiaries

Notes to the Condensed Consolidated Financial Statements

March 31, 2019

(Unaudited)

 

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 $5.4 billion at March 31, 2019 and $5.1 billion at December 31, 2018 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 March 31, 2019 will be included in Cost of products sold at the time the products are sold, generally through the next twelve to eighteen months.

 

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 March 31, 2019 and December 31, 2018, Abbott held the gross notional amount of $10.6 billion and $13.6 billion, respectively, of such foreign currency forward exchange contracts.

 

Abbott is a party to interest rate hedge contracts totaling approximately $2.9 billion at March 31, 2019 and December 31, 2018 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 following table summarizes the amounts and location of certain derivative financial instruments as of March 31, 2019 and December 31, 2018:

 

		Fair Value - Assets								Fair Value - Liabilities
(in millions)		March 31, 2019			Dec. 31, 2018			Balance Sheet Caption		March 31, 2019			Dec. 31, 2018			Balance Sheet Caption
Interest rate swaps designated as fair value hedges		$	—		$	—		Deferred income taxes and other assets		$	57		$	100		Post-employment obligations, deferred income taxes and other long-term liabilities
Foreign currency forward exchange contracts:
Hedging instruments		111			81			Prepaid expenses and other receivables		36			44			Other accrued liabilities
Others not designated as hedges		42			33			Prepaid expenses and other receivables		53			51			Other accrued liabilities
		$	153		$	114				$	146		$	195

 

The following table summarizes the activity for foreign currency forward exchange contracts designated as cash flow hedges 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 ended March 31, 2019 and 2018.

 

		Gain (loss) Recognized in Other Comprehensive Income (loss)						Income (expense) and Gain (loss) Reclassified into Income
(in millions)		2019			2018			2019			2018			Income Statement Caption
Foreign currency forward exchange contracts designated as cash flow hedges		$	(19	)	$	(86	)	$	15		$	(30	)	Cost of products sold
Interest rate swaps designated as fair value hedges		n/a			n/a			43			(106		)	Interest expense

 

Gains of $49 million and losses of $48 million were recognized in the three months ended March 31, 2019 and 2018, 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.

 

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