AbbVie Inc. - Quarter Report: 2014 March (Form 10-Q)

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

FORM 10-Q

 

(Mark One)

 

 

For the quarterly period ended March 31, 2014

 

OR

 

 

For the transition period from                                      to                                     

 

Commission File No. 001-35565

 

ABBVIE INC.

 

 

1 North Waukegan Road

North Chicago, Illinois 60064

 

Telephone:  (847) 932-7900

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.        Yes x  No o

 

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

 

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

 

 

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, 2014, AbbVie Inc. had 1,590,066,459 shares of common stock at $0.01 par value outstanding.

 

Table of Contents

 

AbbVie Inc. and Subsidiaries

Table of Contents

 

 

Part I - Financial Information			Page
Item 1.	Financial Statements and Supplementary Data		3
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations		21
Item 3.	Quantitative and Qualitative Disclosures About Market Risk		28
Item 4.	Controls and Procedures		29
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

 

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PART I.  FINANCIAL INFORMATION

Item 1.  Financial Statements and Supplementary Data

 

AbbVie Inc. and Subsidiaries

Condensed Consolidated Statements of Earnings (unaudited)

 

		Three months ended March 31,
(in millions, except per share data)		2014		2013
Net sales		$4,563		$4,329
Cost of products sold		1,100		1,153
Selling, general and administrative		1,340		1,237
Research and development		772		634
Total operating costs and expenses		3,212		3,024
Operating earnings		1,351		1,305
Interest expense, net		65		66
Net foreign exchange loss		3		15
Other income, net		(3	)	(15	)
Earnings before income tax expense		1,286		1,239
Income tax expense		306		271
Net earnings		$   980		$   968
Per share data
Basic earnings per share		$0.61		$0.61
Diluted earnings per share		$0.61		$0.60
Cash dividends declared per common share(a)		$0.42		$0.80
Weighted-average basic shares outstanding		1,595		1,588
Weighted-average diluted shares outstanding		1,609		1,605

 

(a)            On January 4, 2013, the board of directors declared a cash dividend of $0.40 per share of common stock. This dividend was declared from pre-separation earnings and was recorded as a reduction of additional paid-in capital. In addition, AbbVie declared a regular cash dividend of $0.40 per share of common stock during the first quarter of 2013. Refer to Note 8 for information regarding cash dividends declared and paid during the first quarters of 2014 and 2013.

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

 

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AbbVie Inc. and Subsidiaries
Condensed Consolidated Statements of Comprehensive Income (unaudited)

 

		Three months ended March 31,
(in millions)		2014		2013
Net earnings		$980		$968
Foreign currency translation adjustments		(29)		(232	)
Pension and post-employment benefits, net of tax expense of $4 and $9 for the three months ended March 31, 2014 and 2013, respectively		12		19
Unrealized losses on marketable equity securities		—		(1	)
Hedging activities, net of tax expense of $2 and $2 for the three months ended March 31, 2014 and 2013, respectively		33		9
Other comprehensive income (loss)		16		(205	)
Comprehensive income		$996		$763

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

 

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AbbVie Inc. and Subsidiaries
Condensed Consolidated Balance Sheets

 

(in millions, except share data)		March 31, 2014		December 31, 2013
		(unaudited)
Assets
Current assets
Cash and equivalents		$8,140		$9,595
Short-term investments		960		300
Accounts and other receivables, net		3,650		3,854
Inventories, net		1,104		1,150
Income tax receivable		940		949
Deferred income taxes		1,075		766
Prepaid expenses and other		1,460		1,234
Total current assets		17,329		17,848
Investments		119		118
Property and equipment, net		2,333		2,298
Intangible assets, net of amortization		1,802		1,890
Goodwill		6,271		6,277
Other assets		803		767
Total assets		$28,657		$29,198
Liabilities and Equity
Current liabilities
Short-term borrowings		$          2		$     413
Current portion of long-term debt and lease obligations		18		18
Accounts payable and accrued liabilities		6,196		6,448
Total current liabilities		6,216		6,879
Long-term liabilities		3,358		3,535
Long-term debt and lease obligations		14,386		14,292
Commitments and contingencies
Stockholders’ equity
Common stock, $0.01 par value, authorized 4,000,000,000 shares, issued 1,603,660,660 and 1,594,260,996 shares in 2014 and 2013, respectively		16		16
Common stock held in treasury, at cost, 13,594,201 and 6,900,434 shares in 2014 and 2013, respectively		(672)		(320)
Additional paid-in-capital		3,905		3,671
Retained earnings		1,874		1,567
Accumulated other comprehensive loss		(426)		(442)
Total stockholders’ equity		4,697		4,492
Total liabilities and equity		$28,657		$29,198

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

 

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AbbVie Inc. and Subsidiaries
Condensed Consolidated Statements of Cash Flows (unaudited)

 

		Three months ended March 31,
(in millions) (brackets denote cash outflows)		2014		2013
Cash flows from operating activities
Net earnings		$980		$968
Adjustments to reconcile net earnings to net cash from operating activities:
Depreciation		89		92
Amortization of intangible assets		110		135
Stock-based compensation		106		87
Other, net		(47	)	14
Changes in operating assets and liabilities, net of acquisitions:
Accounts and other receivables		167		57
Inventories		50		11
Prepaid expenses and other assets		(219	)	29
Accounts payable and other liabilities		(612	)	(206	)
Cash flows from operating activities		624		1,187
Cash flows from investing activities
Acquisitions of property and equipment		(137	)	(88	)
Purchases of investment securities		(660	)	—
Sales and maturities of investment securities		—		1,575
Cash flows from investing activities		(797	)	1,487
Cash flows from financing activities
Net change in short-term borrowings		(410	)	(601	)
Dividends paid		(641	)	(636	)
Purchases of treasury stock		(329	)	(97	)
Proceeds from the exercise of stock options		85		91
Net transactions with Abbott Laboratories, excluding noncash items		—		(242	)
Other, net		18		(97	)
Cash flows from financing activities		(1,277	)	(1,582	)
Effect of exchange rate changes on cash and equivalents		(5	)	(14	)
Net (decrease) increase in cash and equivalents		(1,455	)	1,078
Cash and equivalents, beginning of period		9,595		5,901
Cash and equivalents, end of period		$8,140		$6,979

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

 

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AbbVie Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements (unaudited)

 

 

Background

 

The principal business of AbbVie Inc. (AbbVie or the company) is the discovery, development, manufacture and sale of a broad line of pharmaceutical products. Substantially all of AbbVie’s sales in the United States are to three wholesalers. Outside the U.S., products are sold primarily to health care providers or through distributors, depending on the market served.

 

On January 1, 2013, AbbVie became an independent publicly-traded company as a result of the distribution by Abbott Laboratories (Abbott) of 100 percent of the outstanding common stock of AbbVie to Abbott’s shareholders (the separation). On January 1, 2013, Abbott’s shareholders of record as of the close of business on December 12, 2012 received one share of AbbVie common stock for every one share of Abbott common stock held as of the record date. AbbVie’s common stock began trading “regular-way” under the ticker symbol “ABBV” on the New York Stock Exchange on January 2, 2013.

 

In connection with the separation, AbbVie and Abbott entered into transition services agreements covering certain corporate support and back office services that AbbVie has historically received from Abbott. Such services include information technology, accounts payable, payroll, receivables collection, treasury and other financial functions, as well as order entry, warehousing, engineering support, quality assurance support and other administrative services. These agreements facilitate the separation by allowing AbbVie to operate independently prior to establishing stand-alone back office functions across its organization. Transition services may be provided for up to 24 months post-separation, with an option for a one-year extension.

 

During the first three months of 2014 and 2013, AbbVie incurred $80 million and $34 million of separation-related expenses, including legal, information technology and regulatory fees, which were principally classified in selling, general and administrative expenses (SG&A).

 

Basis of Presentation

 

The unaudited interim condensed consolidated financial statements of AbbVie have been prepared pursuant to the rules and regulations of the U.S. Securities and Exchange Commission. Accordingly, certain information and footnote disclosures normally included in annual financial statements prepared in accordance with generally accepted accounting principles in the U.S. (U.S. GAAP) have been omitted. These unaudited interim condensed consolidated financial statements should be read in conjunction with the company’s audited consolidated financial statements and notes included in the company’s Annual Report on Form 10-K for the year ended December 31, 2013.

 

It is management’s opinion that these financial statements include all normal and recurring adjustments necessary for a fair presentation of the company’s financial position and operating results. Net sales and net earnings for any interim period are not necessarily indicative of future or annual results.

 

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For a certain portion of AbbVie’s operations, the legal transfer of AbbVie’s assets (net of liabilities) did not occur with the separation of AbbVie on January 1, 2013 due to the time required to transfer marketing authorizations and satisfy other regulatory requirements in certain countries. Under the terms of the separation agreement with Abbott, AbbVie is responsible for the business activities conducted by Abbott on its behalf, and is subject to the risks and entitled to the benefits generated by these operations and assets. As a result, the related assets and liabilities and results of operations have been reported in AbbVie’s condensed consolidated financial statements as of and for the three months ended March 31, 2014. Net sales related to these operations for the three months ended March 31, 2014 totaled approximately $67 million. At March 31, 2014, the assets and liabilities consisted primarily of accounts receivable of $68 million, inventories of $47 million, other assets of $63 million, and accounts payable and other accrued liabilities of $129 million. At December 31, 2013, the assets and liabilities consisted primarily of accounts receivable of $62 million, inventories of $190 million, other assets of $93 million and accounts payable and other accrued liabilities of $212 million. The majority of these operations are expected to be transferred to AbbVie by the end of 2015.

 

As of March 31, 2014 and December 31, 2013, the aggregate amount due from Abbott totaled $540 million and $738 million, respectively, and was classified in accounts and other receivables, net, in the company’s condensed consolidated balance sheets. The aggregate amount due to Abbott totaled $517 million and $876 million as of March 31, 2014 and December 31, 2013, respectively, and was classified in accounts payable and accrued liabilities in the company’s condensed consolidated balance sheets.

 

 

Interest Expense, Net

 

		Three months ended March 31,
(in millions)		2014		2013
Interest expense		$70		$72
Interest income		(5)		(6)
Interest expense, net		$65		$66

 

Inventories

 

(in millions)		March 31, 2014		December 31, 2013
Finished goods		$  424		$485
Work-in-process		439		404
Raw materials		241		261
Inventories, net		$1,104		$1,150

 

Property and Equipment, Net

 

(in millions)		March 31, 2014		December 31, 2013
Property and equipment, gross		$7,016		$6,909
Less accumulated depreciation		(4,683	)	(4,611	)
Property and equipment, net		$2,333		$2,298

 

Depreciation expense for the three months ended March 31, 2014 and 2013 was $89 million and $92 million, respectively.

 

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AbbVie calculates earnings per share (EPS) using the more dilutive of the treasury stock or the two-class method. For the three months ended March 31, 2014, the two-class method was more dilutive. As such, the dilutive effect of outstanding restricted stock units (RSUs) and restricted stock awards (RSAs) for the three months ended March 31, 2014 of approximately 4 million shares was excluded from the denominator for the calculation of diluted EPS. These awards otherwise would have been included in the calculation of EPS under the treasury stock method. Additionally, all earnings (distributed and undistributed) allocable to participating securities, including performance-based awards not otherwise included in the calculation of EPS under the treasury stock method, was excluded from the numerator for the calculation of basic and diluted earnings per share under the two-class method. Earnings allocable to participating securities for the three months ended March 31, 2014 was $4 million.

 

For the three months ended March 31, 2014, approximately 1 million common shares issuable under stock-based compensation plans were excluded from the computation of earnings per common share assuming dilution because the effect would have been antidilutive.

 

For the three months ended March 31, 2013, AbbVie determined the treasury stock method to be more dilutive. As a result, the dilutive effect of outstanding stock options as well as the dilutive effect of outstanding RSUs and RSAs of approximately 6 million shares were reflected in the denominator for the calculation of diluted EPS for the three months ended March 31, 2013.

 

 

Goodwill

 

The carrying amount of goodwill was $6,271 million and $6,277 million at March 31, 2014 and December 31, 2013, respectively. Changes in the goodwill balance were due to foreign currency translation. As of March 31, 2014, there were no accumulated goodwill impairment losses. Future impairment tests for goodwill will be performed annually in the third quarter, or earlier if indicators of impairment exist.

 

Intangible Assets, Net

 

The following table summarizes AbbVie’s intangible assets.

 

		March 31, 2014								December 31, 2013
(in millions)		Gross carrying amount		Accumulated amortization		Net carrying amount				Gross carrying amount		Accumulated amortization		Net carrying amount
Definite-lived intangible assets
Developed product rights		$4,742		$(3,593)		$1,149				$4,744		$(3,503	)	$1,241
License agreements		1,017		(811)		206				994		(792	)	202
Total definite-lived intangible assets		5,759		(4,404)		1,355				5,738		(4,295	)	1,443
Indefinite-lived research and development		447		—		447				447		—		447
Total intangible assets		$6,206		$(4,404)		$1,802				$6,185		$(4,295	)	$1,890

 

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Intangible assets with finite useful lives are amortized over their estimated useful lives. Amortization expense was $110 million and $135 million for the three months ended March 31, 2014 and 2013, respectively, and is included in cost of products sold in the condensed consolidated statements of earnings.

 

The indefinite-lived intangible assets represent acquired IPR&D associated with products that have not yet received regulatory approval. There were no impairment charges recorded in the three months ended March 31, 2014 and 2013. Future impairment tests for indefinite-lived intangible assets will be performed annually in the third quarter, or earlier if indicators of impairment exist.

 

 

In 2013, AbbVie management approved plans to restructure certain commercial operations in conjunction with the loss and expected loss of exclusivity of certain products. Restructuring charges related to these plans were $2 million for the three months ended March 31, 2014 and were primarily recorded in SG&A in the condensed consolidated statements of earnings.

 

In 2012 and prior years, AbbVie management approved plans to realign its worldwide manufacturing operations and selected domestic and international commercial and research and development (R&D) operations in order to reduce costs. For the three months ended March 31, 2013, AbbVie incurred restructuring charges of approximately $9 million for employee severance and contractual obligations, with $7 million classified in cost of products sold and $2 million as SG&A expenses.

 

The following summarizes the cash activity in the restructuring reserve for the first three months of 2014.

 

(in millions)
Accrued balance at December 31, 2013		$191
2014 restructuring charges		2
Payments and other adjustments		(23)
Accrued balance at March 31, 2014		$170

 

Risk Management Policy

 

The company is exposed to foreign currency exchange rate and interest rate risks related to its business operations. The company’s hedging policy attempts to manage these risks to an acceptable level based on the company’s judgment of the appropriate trade-off between risk, opportunity and costs. The company uses derivative instruments to reduce its exposure to foreign currency exchange rates. The company is also exposed to the risk that its earnings and cash flows could be adversely impacted by fluctuations in interest rates. The company periodically enters into interest rate swaps, based on judgment, to manage interest costs in which the company agrees to exchange, at specified intervals, the difference between fixed and floating interest amounts calculated by reference to an agreed-upon notional amount. Derivative instruments are not used for trading purposes or to manage exposure to changes in interest rates for investment securities, and none of the company’s outstanding derivative instruments contain credit risk related contingent features; collateral is generally not required.

 

Financial Instruments

 

Various AbbVie foreign subsidiaries enter into foreign currency forward exchange contracts to manage exposures to changes in foreign exchange rates for anticipated intercompany transactions denominated in a currency other than the functional currency of the local entity. These contracts, with notional amounts totaling $2.7 billion and $1.5 billion at March 31, 2014 and December 31, 2013, respectively, are designated as cash flow hedges and are recorded at fair value. Accumulated gains and losses as of March 31, 2014 will be included in cost of products sold at the time the products are sold, generally not exceeding twelve months.

 

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The company enters into foreign currency forward exchange contracts to manage its exposure to foreign currency denominated trade payables and receivables and intercompany loans. The contracts are marked-to-market, and resulting gains or losses are reflected in income and are generally offset by losses or gains on the foreign currency exposure being managed. At March 31, 2014 and December 31, 2013, AbbVie held notional amounts of $6.3 billion and $5.3 billion, respectively, of such foreign currency forward exchange contracts.

 

AbbVie is a party to interest rate hedge contracts, designated as fair value hedges, totaling $8.0 billion at both March 31, 2014 and December 31, 2013. The effect of the hedge is to change a fixed-rate interest obligation to a floating rate for that portion of the debt. AbbVie recorded the contracts at fair value and adjusted the carrying amount of the fixed-rate debt by an offsetting amount.

 

The following table summarizes the amounts and location of AbbVie’s derivative instruments as of March 31, 2014.

 

		Derivatives in asset position					Derivatives in liability position
(in millions)		Fair value		Balance sheet caption			Fair value		Balance sheet caption
Interest rate swaps designated as fair value hedges		$—		n/a			$346		Long-term liabilities
Foreign currency forward exchange contracts —
Hedging instruments		17		Prepaid expenses and other			36		Accounts payable and accrued liabilities
Others not designated as hedges		25		Prepaid expenses and other			35		Accounts payable and accrued liabilities
Total		$42					$417

 

The following table summarizes the amounts and location of AbbVie’s derivative instruments as of December 31, 2013.

 

		Derivatives in asset position					Derivatives in liability position
(in millions)		Fair value		Balance sheet caption			Fair value		Balance sheet caption
Interest rate swaps designated as fair value hedges		$—		n/a			$432		Long-term liabilities
Foreign currency forward exchange contracts —
Hedging instruments		—		Prepaid expenses and other			61		Accounts payable and accrued liabilities
Others not designated as hedges		17		Prepaid expenses and other			12		Accounts payable and accrued liabilities
Total		$17					$505

 

While certain derivatives are subject to netting arrangements with the company’s counterparties, the company does not offset derivative assets and liabilities within the condensed consolidated balance sheets.

 

The following table summarizes the activity for derivative instruments and the amounts and location of income (expense) and gain (loss) reclassified into income and for certain other derivative instruments for the three months ended March 31, 2014 and 2013, respectively. The amount of hedge ineffectiveness was not significant for the three months ended March 31, 2014 or 2013.

 

		(Loss) gain recognized in other comprehensive (loss) income				Income (expense) and gain (loss) reclassified into or recorded in net income
(in millions)		2014		2013		2014		2013		Income statement caption
Foreign currency forward exchange contracts —
Designated as cash flow hedges		$21		$9		$(12)		$—		Cost of products sold
Not designated as hedges		n/a		n/a		(1)		(9)		Net foreign exchange loss
Interest rate swaps designated as fair value hedges		n/a		n/a		86		(40)		Interest expense, net

 

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The gain/(loss) related to fair value hedges is recognized in net interest expense and directly offsets the (loss)/gain on the underlying hedged item, the fixed-rate debt, resulting in no net impact to net interest expense for the three months ended March 31, 2014 and 2013.

 

Fair Value Measures

 

The fair value hierarchy under the accounting standard for fair value measurements consists of the following three levels.

 

·                  Level 1 – Valuations based on unadjusted quoted prices in active markets for identical assets that the company has the ability to access;

 

·                  Level 2 – Valuations based on quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active, and model-based valuations in which all significant inputs are observable in the market; and

 

·                  Level 3 – Valuations using significant inputs that are unobservable in the market and include the use of judgment by the company’s management about the assumptions market participants would use in pricing the asset or liability.

 

The following table summarizes the bases used to measure certain assets and liabilities that are carried at fair value on a recurring basis in the condensed consolidated balance sheet as of March 31, 2014.

 

				Basis of fair value measurement
(in millions)		Balance at March 31, 2014		Quoted prices in active markets for identical assets (Level 1)		Significant other observable inputs (Level 2)		Significant unobservable inputs (Level 3)
Assets
Cash and equivalents		$8,140		$618		$7,522		$—
Time deposits		960		—		960		—
Equity securities		12		12		—		—
Foreign currency contracts		42		—		42		—
Total assets		$9,154		$630		$8,524		$—
Liabilities
Interest rate hedges		$346		$—		$346		$—
Foreign currency contracts		71		—		71		—
Contingent consideration		27		—		—		27
Total liabilities		$444		$—		$417		$27

 

The following table summarizes the bases used to measure certain assets and liabilities that are carried at fair value on a recurring basis in the consolidated balance sheet as of December 31, 2013.

 

				Basis of fair value measurement
(in millions)		Balance at December 31, 2013		Quoted prices in active markets for identical assets (Level 1)		Significant other observable inputs (Level 2)		Significant unobservable inputs (Level 3)
Assets
Cash and equivalents		$9,595		$684		$8,911		$—
Time deposits		300		—		300		—
Equity securities		10		10		—		—
Foreign currency contracts		17		—		17		—
Total assets		$9,922		$694		$9,228		$—
Liabilities
Interest rate hedges		$432		$—		$432		$—
Foreign currency contracts		73		—		73		—
Contingent consideration		165		—		—		165
Total liabilities		$670		$—		$505		$165

 

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The fair values for time deposits included in cash and equivalents and short-term investments are determined based on a discounted cash flow analysis reflecting quoted market rates for the same or similar instruments. The fair values of time deposits approximate their amortized cost due to the short maturities of these instruments. Available-for-sale equity securities consists of investments for which the fair value is determined by using the published market price per unit multiplied by the number of units held, without consideration of transaction costs. The derivatives entered into by the company are valued using publicized spot curves for interest rate hedges and publicized forward curves for foreign currency contracts. The contingent consideration is valued using a discounted cash flow technique that reflects management’s expectations about probability of payment.

 

Cumulative unrealized holding gains on available-for-sale equity securities totaled $2 million at both March 31, 2014 and December 31, 2013, respectively.

 

There have been no transfers of assets or liabilities between the fair value measurement levels. The following table is a reconciliation of the fair value measurements that use significant unobservable inputs (Level 3), which consist of contingent payments related to acquisitions and investments.

 

(in millions)
Fair value as of December 31, 2013		$165
Payments		(137	)
Change in fair value recognized in net foreign exchange loss		(1	)
Fair value as of March 31, 2014		$27

 

In connection with the acquisition of Solvay’s U.S. pharmaceuticals business in 2010, the achievement of a certain sales milestone resulted in a payment of approximately $137 million in the first quarter of 2014 for which a liability was previously established.

 

In addition to the financial instruments that the company is required to recognize at fair value on the condensed consolidated balance sheets, the company has certain financial instruments that are recognized at historical cost or some basis other than fair value. The carrying values and fair values of certain financial instruments as of March 31, 2014 and December 31, 2013 are shown in the table below.

 

		Book values				Approximate fair values
(in millions)		March 31, 2014		December 31, 2013		March 31, 2014		December 31, 2013
Assets
Investments		$107		$108		$144		$129
Liabilities
Short-term borrowings		2		413		2		413
Current portion of long-term debt and lease obligations		18		18		18		18
Long-term debt and lease obligations, excluding fair value hedges		14,732		14,724		14,696		14,493

 

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The following table summarizes the bases used to measure the approximate fair values of the financial instruments as of March 31, 2014.

 

					Basis of fair value measurement
(in millions)		Fair value at March 31, 2014			Quoted prices in active markets for identical assets (Level 1)		Significant other observable inputs (Level 2)		Significant unobservable inputs (Level 3)
Assets
Investments		$144			$54		$31		$59
Total assets		$144			$54		$31		$59
Liabilities
Short-term borrowings		$2			$—		$2		$—
Current portion of long-term debt and lease obligations		18			—		18		—
Long-term debt and lease obligations, excluding fair value hedges		14,696			14,609		87		—
Total liabilities		$14,716			$14,609		$107		$—

 

The following table summarizes the bases used to measure the approximate fair values of the financial instruments as of December 31, 2013.

 

					Basis of fair value measurement
(in millions)		Fair value at December 31, 2013			Quoted prices in active markets for identical assets (Level 1)		Significant other observable inputs (Level 2)		Significant unobservable inputs (Level 3)
Assets
Investments		$129			$39		$30		$60
Total assets		$129			$39		$30		$60
Liabilities
Short-term borrowings		$413			$—		$413		$—
Current portion of long-term debt and lease obligations		18			—		18		—
Long-term debt and lease obligations, excluding fair value hedges		14,493			14,413		80		—
Total liabilities		$14,924			$14,413		$511		$—

 

Investments consist of cost method investments and held-to-maturity debt securities. Cost method investments include certain investments for which the fair value is determined by using the published market price per unit multiplied by the number of units held, without consideration of transaction costs. To determine the fair value of other cost method investments, the company takes into consideration recent transactions, as well as the financial information of the investee, which represents a Level 3 basis of fair value measurement. The fair value of held-to-maturity debt securities was estimated based upon the quoted market prices for the same or similar debt instruments. The fair values of short-term and current borrowings approximate the carrying values due to the short maturities of these instruments.

 

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The fair value of long-term debt, excluding fair value hedges, was determined by using the published market price for the debt instruments, without consideration of transaction costs, which represents a Level 1 basis of fair value measurement. The counterparties to financial instruments consist of select major international financial institutions.

 

Concentrations of Risk

 

The company invests excess cash in time deposits, money market funds and U.S. Treasury securities and diversifies the concentration of cash among different financial institutions. The company monitors concentrations of credit risk associated with deposits with financial institutions. Credit exposure limits have been established to limit a concentration with any single issuer or institution.

 

Three U.S. wholesalers accounted for 34 percent and 38 percent of total net accounts receivable as of March 31, 2014 and December 31, 2013, respectively, and substantially all of AbbVie’s U.S. sales are to these three wholesalers. In addition, net governmental receivables outstanding in Greece, Portugal, Italy and Spain totaled $566 million at March 31, 2014 and $781 million at December 31, 2013.

 

HUMIRA is AbbVie’s single largest product and accounted for approximately 58 percent and 52 percent of AbbVie’s total net sales in the first three months ended March 31, 2014 and 2013, respectively.

 

Short-Term Borrowings

 

At December 31, 2013, short-term borrowings included $400 million of commercial paper borrowings. No commercial paper balances were outstanding as of March 31, 2014. The weighted-average interest rate on the commercial paper was 0.2% for the three months ended March 31, 2014. No borrowings were outstanding under the $2.0 billion unsecured bank credit facility as of March 31, 2014.

 

 

The following is the summary of net periodic benefit cost relating to the company’s defined benefit and other post-employment plans.

 

		Defined benefit plans				Other post- employment plans
for the three months ended March 31 (in millions)		2014		2013		2014		2013
Service cost		$43		$47		$5		$6
Interest cost		55		48		6		6
Expected return on plan assets		(75	)	(66)		—		—
Amortization of actuarial losses and prior service costs		17		28		(1)		—
Net periodic benefit cost		$40		$57		$10		$12

 

AbbVie made voluntary contributions of $370 million in the first quarter of 2014 and $145 million in the first quarter of 2013 to its main domestic defined benefit pension plan.

 

 

Stock-Based Compensation

 

Stock-based compensation expense was $106 million and $87 million for the three months ended March 31, 2014 and 2013, respectively. For the three months ended March 31, 2014, $68 million of stock-based compensation expense was classified in SG&A, $34 million in R&D and $4 million in cost of products sold. For the three months ended March 31, 2013, $57 million of stock-based compensation expense was classified in SG&A, $25 million in R&D and $5 million in cost of products sold.

 

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Prior to separation, AbbVie employees participated in Abbott’s incentive stock program. The AbbVie 2013 Incentive Stock Program, adopted at the time of separation, facilitated the assumption of certain awards granted under Abbott’s incentive stock program and authorizes the post-separation grant of several different forms of benefits, including nonqualified stock options, RSAs, RSUs and performance-based RSAs and RSUs.

 

In connection with the separation, outstanding Abbott employee stock options, RSAs and RSUs previously issued under Abbott’s incentive stock program were adjusted and converted into new Abbott and AbbVie stock-based awards using a formula designed to preserve the intrinsic value and fair value of the awards immediately prior to the separation. Upon the separation on January 1, 2013, holders of Abbott stock options, RSAs and RSUs generally received one AbbVie stock-based award for each Abbott stock-based award outstanding. These adjusted awards retained the vesting schedule and expiration date of the original awards. No awards have been granted to Abbott employees other than in connection with the separation.

 

Stock Options

 

AbbVie determines the fair value of stock options using the Black-Scholes model. The assumptions used in estimating the fair value of stock options granted during the three months ended March 31, 2014 and 2013, along with the grant-date fair value, were as follows.

 

		Three months ended March 31,
		2014		2013
Risk-free interest rate		1.9	%	1.1	%
Average life of options (years)		6.0		6.0
Volatility		27.01	%	32.63	%
Dividend yield		3.2	%	4.3	%
Fair value per stock option		$9.83		$6.87

 

The following table summarizes AbbVie stock option activity for both AbbVie and Abbott employees for the three months ended March 31, 2014.

 

(options in thousands, aggregate intrinsic value in millions)		Options		Weighted- average exercise price		Weighted- average remaining life (in years)		Aggregate intrinsic value
Outstanding at December 31, 2013		35,994		$27.48
Granted		1,035		51.92
Exercised		(3,274	)	28.86
Lapsed		(49	)	23.89
Outstanding at March 31, 2014		33,706		28.10		3.8		$786
Exercisable at March 31, 2014		30,967		$27.02		3.3		$756

 

The aggregate intrinsic value in the table above represents the difference between the exercise price and the company’s closing stock price on the last day of trading for the three months ended March 31, 2014. The total intrinsic value of options exercised in the three months ended March 31, 2014 and 2013 was $72 million and $42 million, respectively.

 

As of March 31, 2014, $5 million of unrecognized compensation cost related to stock options is expected to be recognized as expense over approximately the next two years.

 

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RSAs & RSUs

 

The following table summarizes AbbVie RSA and RSU activity (including performance-based awards) for both AbbVie and Abbott employees for the three months ended March 31, 2014.

 

(share units in thousands)		Share units		Weighted-average grant date fair value
Outstanding at December 31, 2013		14,910		$32.07
Granted		4,482		51.23
Vested		(6,193	)	29.05
Lapsed		(124	)	32.71
Outstanding at March 31, 2014		13,075		$ 40.04
Unvested shares at March 31, 2014		12,771		$ 40.23

 

The fair value of RSAs and RSUs (including performance-based awards) is determined based on the number of shares granted and the quoted price of the company’s common stock on the date of the grant. The fair market value of RSAs and RSUs vested in the three months ended March 31, 2014 and 2013 was $314 million and $267 million, respectively. As of March 31, 2014, $280 million of unrecognized compensation cost related to RSAs and RSUs is expected to be recognized as expense over approximately the next two years.

 

Cash Dividends

 

On February 20, 2014, the board of directors declared a quarterly cash dividend of $0.42 per share, which represented an increase of 5 percent over the previous quarterly rate of $0.40 per share. The dividend is payable May 15, 2014 to stockholders of record at the close of business on April 15, 2014. Additionally, the quarterly cash dividend declared by the board of directors on December 12, 2013 of $0.40 per share of common stock for stockholders of record on January 15, 2014 was paid on February 14, 2014.

 

On January 4 and February 15, 2013, the board of directors declared quarterly cash dividends of $0.40 per share of common stock, which were paid on February 15 and May 15, 2013, respectively. The cash dividend of $0.40 per share of common stock declared on January 4, 2013 was declared from pre-separation earnings and was recorded as a reduction of additional paid-in capital.

 

Stock Repurchase Program

 

On February 15, 2013, AbbVie’s board of directors authorized a $1.5 billion stock repurchase program. Purchases of AbbVie shares may be made from time to time at management’s discretion depending on the company’s cash flows, net debt level and market conditions. The plan has no time limit and can be discontinued at any time. During the three months ended March 31, 2014, AbbVie repurchased approximately 5 million shares for $250 million in the open market. Shares repurchased under this program are recorded at acquisition cost, including related expenses, and are available for general corporate purposes. AbbVie’s remaining share repurchase authorization is $1.0 billion as of March 31, 2014. There were no share repurchases in the first quarter of 2013.

 

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Accumulated Other Comprehensive Loss

 

The following table summarizes the changes in balances of each component of accumulated other comprehensive loss, net of tax for the three months ended March 31, 2014.

 

(in millions) (brackets denote losses)		Foreign currency translation adjustments		Pension and post- employment benefits		Unrealized gains (losses) on marketable equity securities		Gains (losses) on hedging activities		Total
Balance as of December 31, 2013		$470		$(827	)	$2		$(87	)	$(442	)
Other comprehensive (loss) income before reclassifications		(29	)	—		—		21		(8	)
Amounts reclassified from accumulated other comprehensive loss		—		12		—		12		24
Net current-period other comprehensive (loss) income		(29	)	12		—		33		16
Balance as of March 31, 2014		$441		$(815	)	$2		$(54	)	$(426	)

 

The table below presents the significant amounts reclassified out of each component of accumulated other comprehensive loss for the three months ended March 31, 2014.

 

Type of reclassification (brackets denote loss)		Amount reclassified from accumulated other comprehensive loss (in millions)		Affected line item in the condensed consolidated statement of earnings
Pension and post-employment benefits
Amortization of actuarial losses and other		16		(a)
Tax expense		(4)
Total reclassification for the three months ended March 31, 2014, net of tax		$12

 

(a) Components are included in computation of net periodic benefit cost (see Note 7 for details)

 

 

The effective income tax rates were 23.8 percent and 21.9 percent in the first quarters of 2014 and 2013, respectively. The effective tax rates in both periods were less than the statutory federal income tax rate of 35 percent primarily due to the benefit of lower income tax rates in locations outside the United States and tax exemptions and incentives in Puerto Rico and other foreign tax jurisdictions. The increase in the effective tax rate in the first quarter of 2014 over the prior year was principally due to changes in the jurisdictional mix of earnings.

 

It is reasonably possible during the next twelve months that uncertain tax positions may be settled, and the gross unrecognized tax benefits balance may change up to $22 million. AbbVie and Abbott entered into a tax sharing agreement effective on the date of separation. For tax contingencies prior to the separation, Abbott will indemnify and hold AbbVie harmless if the tax positions are settled for amounts in excess of recorded liabilities, and AbbVie will not benefit if prior tax positions are resolved more favorably than recorded amounts.

 

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Subject to certain exceptions specified in the separation agreement, AbbVie assumed the liability for, and control of, all pending and threatened legal matters related to its business, including liabilities for any claims or legal proceedings related to products that had been part of its business but were discontinued prior to the distribution, as well as assumed or retained liabilities, and will indemnify Abbott for any liability arising out of or resulting from such assumed legal matters. AbbVie is involved in various claims, legal proceedings and investigations, including those described below. The recorded accrual balance for litigation at March 31, 2014 was not significant. Within the next year, other legal proceedings may occur that may result in a change in the estimated loss accrued by AbbVie. While it is not feasible to predict the outcome of all other proceedings and exposures with certainty, management believes that their ultimate disposition should not have a material adverse effect on AbbVie’s consolidated financial position, cash flows, or results of operations.

 

Lawsuits have been filed against AbbVie and others generally alleging that the 2005 patent litigation settlement involving Niaspan® entered into between Kos Pharmaceuticals, Inc. (a company acquired by Abbott Laboratories in 2006 and presently a subsidiary of AbbVie) and a generic company violates federal and state antitrust laws and state unfair and deceptive trade practices and unjust enrichment laws. Plaintiffs generally seek monetary damages and/or injunctive relief and attorneys’ fees. In September 2013, all of these pending putative class action lawsuits were centralized for consolidated or coordinated pre-trial proceedings in the United States District Court for the Eastern District of Pennsylvania under the Multi-District Litigation Rules as In re Niaspan Antitrust Litigation, MDL No. 2460.

 

In August 2013, a putative class action lawsuit, Sidney Hillman Health Center of Rochester, et al. v. AbbVie Inc., et al., was filed against AbbVie in the United States District Court for the Northern District of Illinois by three healthcare benefit providers alleging violations of federal RICO statutes and state deceptive business practice and unjust enrichment laws in connection with reimbursements for certain uses of Depakote from 1998 to 2012. Plaintiffs seek monetary damages and/or equitable relief and attorneys’ fees.

 

Several pending lawsuits filed against Unimed Pharmaceuticals, Inc., Solvay Pharmaceuticals, Inc. (a company Abbott acquired in February 2010 and now known as AbbVie Products LLC) and others were consolidated for pre-trial purposes in the United States District Court for the Northern District of Georgia under the Multi District Litigation Rules as In re AndroGel Antitrust Litigation, MDL No. 2084. These cases, brought by private plaintiffs and the Federal Trade Commission (FTC), generally allege Solvay’s 2006 patent litigation involving AndroGel was sham litigation and the patent litigation settlement agreement and related agreements with three generic companies violate federal and state antitrust laws and state consumer protection and unjust enrichment laws. Plaintiffs generally seek monetary damages and/or injunctive relief and attorneys’ fees. MDL 2084 includes: (a) three individual plaintiff lawsuits; (b) seven purported class actions; and (c) Federal Trade Commission v. Watson Pharmaceuticals, Inc. et al., filed in May 2009 in the United States District Court for the Northern District of Georgia. Following the district court’s dismissal of all plaintiffs’ claims, the FTC’s appeal led to its claim regarding the patent litigation settlement being reinstated. In February 2014, the United States Court of Appeals for the Eleventh Circuit remanded the private plaintiffs’ claims regarding the patent litigation settlement, which are proceeding with the FTC’s in discovery in the district court.

 

AbbVie is seeking to enforce its patent rights relating to testosterone gel (a drug AbbVie sells under the trademark AndroGel® 1.62%). In a case filed in the United States District Court for the District of Delaware in February 2013, AbbVie alleges that Perrigo Company’s and Perrigo Israel Pharmaceutical Ltd.’s proposed generic product infringes AbbVie patents and seeks declaratory and injunctive relief. In a second case filed in the United States District Court for the District of Delaware in March 2013, AbbVie alleges that Watson Laboratories Inc.’s and Actavis Inc.’s proposed generic product infringes AbbVie’s patents and seeks declaratory and injunctive relief.

 

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AbbVie is seeking to enforce its patent rights relating to ritonavir/lopinavir tablets (a drug AbbVie sells under the trademark Kaletra®). In a case filed in the United States District Court for the Northern District of Illinois in March 2009, AbbVie alleges that Matrix Laboratories, Inc.’s, Matrix Laboratories, Ltd.’s, and Mylan, Inc.’s proposed generic products infringe AbbVie’s patents and seeks declaratory and injunctive relief. Upon Matrix’s motion in November 2009, the court granted a five-year stay of the litigation unless good cause to lift the stay is shown.

 

AbbVie is seeking to enforce its patent rights relating to ritonavir tablets (a drug AbbVie sells under the trademark Norvir®). In a case pending in the United States District Court for the Southern District of Ohio since April 2012, AbbVie alleges that Roxane Laboratories, Inc.’s (Roxane) proposed generic product infringes AbbVie’s patents and seeks declaratory and injunctive relief. In another case filed in the United States District Court for the Southern District of Ohio in July 2013, AbbVie alleges that Roxane’s proposed generic ritonavir product infringes additional AbbVie patents and seeks declaratory and injunctive relief on these additional patents. In a separate case filed in the United States District Court for the District of Delaware in May 2013, AbbVie alleges that Hetero USA Inc.’s and Hetero Labs Limited’s proposed generic ritonavir tablets product infringes AbbVie’s patents and seeks declaratory and injunctive relief.

 

AbbVie is seeking to enforce certain patent rights that cover the use of fully human anti-TNF alpha antibodies with methotrexate to treat rheumatoid arthritis. In a case filed in the United States District Court for the District of Massachusetts in May 2009, AbbVie alleges Centocor Ortho Biotech, Inc.’s (now Janssen Biotech, Inc.’s) product Simponi® infringes AbbVie’s patents and seeks damages and injunctive relief.

 

In November 2007, GlaxoSmithKline filed a lawsuit against Abbott Laboratories in the United States District Court for the Northern District of California alleging that Abbott violated antitrust laws in connection with the 2003 Norvir re-pricing. In March 2011, a jury found that Abbott did not violate antitrust laws, but breached its license agreement with the plaintiff. In January 2014, a 3-judge panel of the United States Court of Appeals for the Ninth Circuit reversed this verdict and remanded the case for a new trial due to the alleged improper exclusion of a potential juror. In March 2014, the Ninth Circuit instructed the parties to file briefs on whether the Ninth Circuit should rehear the case en banc. AbbVie assumed the liability for and control of certain legal matters, including this proceeding, in connection with its separation from Abbott.

 

Note 11  Segment Information

 

AbbVie operates in one business segment—pharmaceutical products. Substantially all of AbbVie’s U.S. sales are to three wholesalers. Outside the United States, products are sold primarily to health care providers or through distributors, depending on the market served. Worldwide net sales of key products were as follows.

 

		Three months ended March 31,
(in millions)		2014		2013
HUMIRA		$2,637		$2,244
Synagis		354		345
AndroGel		254		240
Kaletra		195		219
Lupron		189		181
Synthroid		157		119
Sevoflurane		142		137
Creon		107		90
Duodopa		52		39
Dyslipidemia products		96		344
All other		380		371
Net sales		$4,563		$4,329

 

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