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, 2014
OR
o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission File No. 1-2189
ABBOTT LABORATORIES
An Illinois Corporation |
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I.R.S. Employer Identification No. |
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36-0698440 |
100 Abbott Park Road
Abbott Park, Illinois 60064-6400
Telephone: (224) 667-6l00
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, 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. (Check one):
Large Accelerated Filer x |
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Accelerated Filer o |
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Non-Accelerated Filer o |
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Smaller reporting company o |
(Do not check if a smaller reporting company) |
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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, 2014, Abbott Laboratories had 1,505,790,586 common shares without par value outstanding.
Abbott Laboratories
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Page |
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Item 1. Financial Statements and Supplementary Data |
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3 | |
4 | |
5 | |
6 | |
7 | |
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Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations |
17 |
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23 | |
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24 | |
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Item 2. Unregistered Sales of Equity Securities and Use of Proceeds |
24 |
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24 | |
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25 |
Abbott Laboratories and Subsidiaries
Condensed Consolidated Statement of Earnings
(Unaudited)
(dollars in millions except per share data; shares in thousands)
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Three Months Ended |
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Nine Months Ended |
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September 30 |
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September 30 |
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2014 |
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2013 |
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2014 |
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2013 |
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Net Sales |
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$ |
5,104 |
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$ |
4,825 |
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$ |
14,957 |
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$ |
14,643 |
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Cost of products sold, excluding amortization of intangible assets |
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2,331 |
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2,255 |
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6,918 |
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6,854 |
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Amortization of intangible assets |
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132 |
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146 |
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392 |
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441 |
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Research and development |
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307 |
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339 |
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989 |
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1,012 |
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Selling, general and administrative |
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1,603 |
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1,612 |
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4,886 |
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4,831 |
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Total Operating Cost and Expenses |
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4,373 |
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4,352 |
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13,185 |
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13,138 |
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Operating Earnings |
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731 |
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473 |
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1,772 |
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1,505 |
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Interest expense |
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35 |
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37 |
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107 |
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112 |
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Interest (income) |
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(18 |
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(16 |
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(54 |
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(48 |
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Net foreign exchange loss (gain) |
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(1 |
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(2 |
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1 |
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36 |
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Other (income) expense, net |
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(3 |
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(27 |
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2 |
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(28 |
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Earnings from Continuing Operations Before Taxes |
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718 |
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481 |
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1,716 |
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1,433 |
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Taxes on Earnings from Continuing Operations |
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278 |
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(163 |
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627 |
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(71 |
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Earnings from Continuing Operations |
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440 |
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644 |
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1,089 |
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1,504 |
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Earnings from Discontinued Operations, net of taxes |
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98 |
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322 |
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291 |
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483 |
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Net Earnings |
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$ |
538 |
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$ |
966 |
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$ |
1,380 |
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$ |
1,987 |
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Basic Earnings Per Common Share |
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Continuing Operations |
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$ |
0.29 |
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$ |
0.41 |
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$ |
0.71 |
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$ |
0.96 |
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Discontinued Operations |
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0.07 |
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0.21 |
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0.19 |
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0.30 |
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Net Earnings |
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$ |
0.36 |
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$ |
0.62 |
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$ |
0.90 |
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$ |
1.26 |
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Diluted Earnings Per Common Share |
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Continuing Operations |
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$ |
0.29 |
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$ |
0.41 |
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$ |
0.71 |
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$ |
0.95 |
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Discontinued Operations |
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0.07 |
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0.20 |
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0.19 |
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0.30 |
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Net Earnings |
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$ |
0.36 |
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$ |
0.61 |
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$ |
0.90 |
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$ |
1.25 |
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Cash Dividends Declared Per Common Share |
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$ |
0.22 |
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$ |
0.14 |
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$ |
0.66 |
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$ |
0.42 |
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Average Number of Common Shares Outstanding Used for Basic Earnings Per Common Share |
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1,508,596 |
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1,551,803 |
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1,517,834 |
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1,560,369 |
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Dilutive Common Stock Options and Awards |
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11,184 |
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14,888 |
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10,798 |
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16,114 |
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Average Number of Common Shares Outstanding Plus Dilutive Common Stock Options and Awards |
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1,519,780 |
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1,566,691 |
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1,528,632 |
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1,576,483 |
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Outstanding Common Stock Options Having No Dilutive Effect |
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535 |
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1,601 |
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535 |
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1,015 |
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The accompanying notes to the condensed consolidated financial statements are an integral part of this statement.
Abbott Laboratories and Subsidiaries
Condensed Consolidated Statement of Comprehensive Income
(Unaudited)
(dollars in millions)
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Three Months Ended |
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Nine Months Ended |
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September 30 |
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September 30 |
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2014 |
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2013 |
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2014 |
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2013 |
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Net Earnings |
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$ |
538 |
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$ |
966 |
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$ |
1,380 |
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$ |
1,987 |
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Foreign currency translation gain (loss) adjustments |
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(1,096 |
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270 |
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(1,053 |
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(480 |
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Net actuarial gains (losses) and amortization of net actuarial (losses) and prior service (cost) and credits, net of taxes of $7 and $22 in 2014 and $9 and $(1) in 2013 |
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16 |
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18 |
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44 |
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5 |
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Unrealized gains (losses) on marketable equity securities, net of taxes of $(5) and $(7) in 2014 and ($4) and ($2) in 2013 |
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(8 |
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(7 |
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(12 |
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(4 |
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Net adjustments for derivative instruments designated as cash flow hedges and other, net of taxes of $14 and $12 in 2014 and $(3) and $(9) in 2013 |
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65 |
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(11 |
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58 |
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(34 |
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Other Comprehensive Income (Loss) |
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(1,023 |
) |
270 |
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(963 |
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(513 |
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Comprehensive Income (Loss) |
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$ |
(485 |
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$ |
1,236 |
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$ |
417 |
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$ |
1,474 |
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Supplemental Accumulated Other Comprehensive Income (Loss) |
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Sept. 30, |
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December 31, |
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Cumulative foreign currency translation (loss) adjustments |
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$ |
(1,771 |
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$ |
(718 |
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Net actuarial (losses) and prior service cost and credits |
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(1,268 |
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(1,312 |
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Cumulative unrealized gains on marketable equity securities |
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1 |
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13 |
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Cumulative gains (losses) on derivative instruments designated as cash flow hedges and other |
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63 |
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5 |
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The accompanying notes to condensed consolidated financial statements are an integral part of this statement.
Abbott Laboratories and Subsidiaries
Condensed Consolidated Balance Sheet
(Unaudited)
(dollars in millions)
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September 30, |
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December 31, |
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Assets |
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Current Assets: |
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Cash and cash equivalents |
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$ |
3,613 |
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$ |
3,475 |
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Investments, primarily bank time deposits and U.S. treasury bills |
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1,264 |
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4,623 |
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Trade receivables, less allowances of $332 in 2014 and $312 in 2013 |
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3,618 |
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3,986 |
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Inventories: |
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Finished products |
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1,873 |
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1,866 |
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Work in process |
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290 |
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349 |
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Materials |
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533 |
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478 |
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Total inventories |
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2,696 |
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2,693 |
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Prepaid expenses, deferred income taxes, and other receivables |
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4,173 |
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4,032 |
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Current assets held for disposition |
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1,100 |
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438 |
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Total Current Assets |
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16,464 |
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19,247 |
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Investments |
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221 |
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119 |
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Property and equipment, at cost |
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12,694 |
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12,870 |
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Less: accumulated depreciation and amortization |
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6,822 |
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6,965 |
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Net property and equipment |
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5,872 |
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5,905 |
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Intangible assets, net of amortization |
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6,094 |
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5,735 |
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Goodwill |
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10,048 |
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9,772 |
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Deferred income taxes and other assets |
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1,772 |
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2,109 |
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Non-current assets held for disposition |
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2,043 |
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66 |
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$ |
42,514 |
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$ |
42,953 |
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Liabilities and Shareholders Investment |
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Current Liabilities: |
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Short-term borrowings |
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$ |
4,376 |
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$ |
3,164 |
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Trade accounts payable |
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965 |
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1,026 |
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Salaries, wages and commissions |
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867 |
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906 |
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Other accrued liabilities |
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2,875 |
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3,500 |
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Dividends payable |
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332 |
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341 |
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Income taxes payable |
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481 |
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175 |
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Current portion of long-term debt |
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206 |
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9 |
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Current liabilities held for disposition |
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721 |
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386 |
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Total Current Liabilities |
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10,823 |
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9,507 |
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Long-term debt |
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3,719 |
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3,388 |
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Post-employment obligations, deferred income taxes and other long-term liabilities |
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4,883 |
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4,784 |
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Non-current liabilities held for disposition |
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96 |
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7 |
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Commitments and Contingencies |
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Shareholders Investment: |
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Preferred shares, one dollar par value Authorized 1,000,000 shares, none issued |
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Common shares, without par value Authorized - 2,400,000,000 shares |
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12,207 |
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12,048 |
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Common shares held in treasury, at cost - Shares: 2014: 186,918,107; 2013: 137,728,810 |
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(8,679 |
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(6,844 |
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Earnings employed in the business |
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22,335 |
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21,979 |
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Accumulated other comprehensive income (loss) |
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(2,975 |
) |
(2,012 |
) | ||
Total Abbott Shareholders Investment |
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22,888 |
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25,171 |
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Noncontrolling Interests in Subsidiaries |
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105 |
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96 |
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Total Shareholders Investment |
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22,993 |
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25,267 |
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$ |
42,514 |
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$ |
42,953 |
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The accompanying notes to condensed consolidated financial statements are an integral part of this statement.
Abbott Laboratories and Subsidiaries
Condensed Consolidated Statement of Cash Flows
(Unaudited)
(dollars in millions)
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Nine Months Ended September 30 |
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2014 |
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2013 |
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Cash Flow From (Used in) Operating Activities: |
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Net earnings |
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$ |
1,380 |
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$ |
1,987 |
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Adjustments to reconcile net earnings to net cash from operating activities - |
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Depreciation |
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689 |
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700 |
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Amortization of intangibles |
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464 |
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593 |
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Share-based compensation |
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208 |
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222 |
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Trade receivables |
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(173 |
) |
22 |
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Inventories |
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(203 |
) |
(242 |
) | ||
Other, net |
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72 |
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(1,583 |
) | ||
Net Cash From Operating Activities |
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2,437 |
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1,699 |
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Cash Flow From (Used in) Investing Activities: |
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Acquisitions of property and equipment |
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(790 |
) |
(842 |
) | ||
Acquisitions of business and technology |
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(2,822 |
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(566 |
) | ||
Sales (Purchases) of investment securities, net |
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3,358 |
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(3,380 |
) | ||
Other |
|
62 |
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19 |
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Net Cash (Used in) Investing Activities |
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(192 |
) |
(4,769 |
) | ||
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Cash Flow From (Used in) Financing Activities: |
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Proceeds from issuance of short-term debt and other |
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1,269 |
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3,524 |
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Contingent and other consideration payments related to business acquisitions |
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(400 |
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(400 |
) | ||
Transfer of cash and cash equivalents to AbbVie Inc. |
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(5,901 |
) | ||
Purchases of common shares |
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(2,194 |
) |
(1,566 |
) | ||
Proceeds from stock options exercised, including income tax benefit |
|
290 |
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180 |
| ||
Dividends paid |
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(1,007 |
) |
(664 |
) | ||
Net Cash (Used in) Financing Activities |
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(2,042 |
) |
(4,827 |
) | ||
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Effect of exchange rate changes on cash and cash equivalents |
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(65 |
) |
(23 |
) | ||
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Net Increase (Decrease) in Cash and Cash Equivalents |
|
138 |
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(7,920 |
) | ||
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Cash and Cash Equivalents, Beginning of Year |
|
3,475 |
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10,802 |
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Cash and Cash Equivalents, End of Period |
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$ |
3,613 |
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$ |
2,882 |
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The accompanying notes to the condensed consolidated financial statements are an integral part of this statement.
Abbott Laboratories and Subsidiaries
Notes to the Condensed Consolidated Financial Statements
September 30, 2014
(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 Abbotts Annual Report on Form 10-K for the year ended December 31, 2013. The consolidated financial statements include the accounts of the parent company and subsidiaries, after elimination of intercompany transactions.
Note 2 Separation of AbbVie Inc.
On January 1, 2013, Abbott completed the separation of AbbVie Inc. (AbbVie), which was formed to hold Abbotts research-based proprietary pharmaceuticals business. Abbott and AbbVie entered into transitional services agreements prior to the separation pursuant to which Abbott and AbbVie are providing to each other, on an interim transitional basis, various services. Transition services may be provided for up to 24 months with an option for a one-year extension by the recipient. Services being provided by Abbott include certain information technology and back office support. Billings by Abbott under these transitional services agreements are recorded as a reduction of the costs to provide the respective service in the applicable expense category in the Condensed Consolidated Statement of Earnings. This transitional support will enable AbbVie to establish its stand-alone processes for various activities that were previously provided by Abbott and does not constitute significant continuing support of AbbVies operations.
For a small portion of AbbVies operations, the legal transfer of AbbVies assets (net of liabilities) did not occur with the separation of AbbVie on January 1, 2013, in certain countries, due to the time required to transfer marketing authorizations and other regulatory requirements in each of these countries. Under the terms of the separation agreement with Abbott, AbbVie is subject to the risks and entitled to the benefits generated by these operations and assets. The majority of these operations were transferred to AbbVie in 2013 and 2014 with the remainder expected to be transferred in 2015. These assets and liabilities have been presented as held for disposition in the Condensed Consolidated Balance Sheet. At September 30, 2014, the assets and liabilities held for disposition consist of trade accounts receivable of $124 million, inventories of $121 million, equipment of $5 million, other assets of $62 million, trade accounts payable and accrued liabilities of $268 million and other liabilities of $1 million. Abbotts obligation to transfer the net assets held for disposition to AbbVie of $43 million is included in Other accrued liabilities.
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 taxes attributable to AbbVies business. AbbVie generally will be liable for all other taxes attributable to its business.
Earnings from discontinued operations in the third quarter and first nine months of 2014 include the recognition of $5 million of tax expense and $37 million of net tax benefits, respectively, primarily as a result of the resolution of various tax positions related to AbbVies operations for years prior to the separation. Earnings from discontinued operations in the third quarter and first nine months of 2013 includes a favorable adjustment to tax expense of $193 million as a result of the resolution of various tax positions related to AbbVies operations for years prior to the separation.
Note 3- Discontinued Operations
On July 14, 2014, Abbott announced that it will sell its developed markets branded generics pharmaceuticals business to Mylan Inc. (Mylan) for equity ownership of a newly formed entity that will combine Mylans existing business and Abbotts developed markets pharmaceuticals business, and will be publicly traded. Historically, this business was included in Abbotts Established Pharmaceutical Products segment. Abbott will retain its branded generics pharmaceuticals business in emerging markets. The transaction is expected to close in the first quarter of 2015 and is subject to customary closing conditions, including regulatory approvals. As a result of the planned disposition of the developed markets branded generics pharmaceuticals business, the current and prior year operating results of this business are reported as part of discontinued operations on the Earnings from Discontinued Operations, net of tax line in the Condensed Consolidated Statement of Earnings. Discontinued operations include an allocation of interest expense assuming a uniform ratio of consolidated debt to equity for all of Abbotts historical operations.
The operating results of Abbotts developed markets branded generics pharmaceuticals businesses are as follows:
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Three Months |
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Nine Months |
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|
|
Ended Sept. 30 |
|
Ended Sept. 30 |
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(in millions) |
|
2014 |
|
2013 |
|
2014 |
|
2013 |
| ||||
Net sales |
|
$ |
519 |
|
$ |
544 |
|
$ |
1,461 |
|
$ |
1,550 |
|
Pretax income |
|
160 |
|
148 |
|
323 |
|
350 |
| ||||
Net income |
|
103 |
|
129 |
|
253 |
|
290 |
| ||||
At the close of this transaction Abbott and Mylan will enter into transitional services agreements pursuant to which Abbott and Mylan will provide various back office support services to each other on an interim transitional basis. Transition services may be provided for up to 2 years. Billings by Abbott under these transitional services agreements will be recorded as a reduction of the costs to provide the respective service in the applicable expense category in the Condensed Consolidated Statement of Earnings. This transitional support will not constitute significant continuing support of Mylans operations. Abbott will also enter into manufacturing supply agreements with Mylan related to certain products, with the supply term ranging from 3 to 10 years and requiring a 2 year notice prior to termination. The cash flows associated with these transitional service and manufacturing supply agreements are not expected to be significant.
The assets of the operations held for disposition and the liabilities to be assumed in the disposition related to the businesses noted above, as well as the AbbVie assets and liabilities discussed in Note 2 are classified as held for disposition in the Condensed Consolidated Balance Sheet as of September 30, 2014. Prior period balance sheets have not been adjusted. The cash flows associated with the developed markets branded generics pharmaceuticals businesses will be included in Abbotts Condensed Consolidated Statement of Cash Flows up through the date of disposition. The following is a summary of the assets and liabilities held for disposition:
(in millions) |
|
September 30, |
| |
Trade receivables, net |
|
$ |
640 |
|
Total inventories |
|
323 |
| |
Prepaid expenses, deferred income taxes, and other receivables |
|
137 |
| |
Current assets held for disposition |
|
1,100 |
| |
Net property and equipment |
|
150 |
| |
Intangible assets, net of amortization |
|
838 |
| |
Goodwill |
|
1,005 |
| |
Deferred income taxes and other assets |
|
50 |
| |
Non-current assets held for disposition |
|
2,043 |
| |
Total assets held for disposition |
|
$ |
3,143 |
|
|
|
|
| |
Trade accounts payable |
|
$ |
459 |
|
Salaries, wages, commissions and other accrued liabilities |
|
262 |
| |
Current liabilities held for disposition |
|
721 |
| |
Post-employment obligations, deferred income taxes and other long-term liabilities |
|
96 |
| |
Total liabilities held for disposition |
|
$ |
817 |
|
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 September 30, 2014 and 2013 were $438 million and $640 million, respectively and for the nine months ended September 30, 2014 and 2013 were $1.083 billion and $1.495 billion, respectively. Net earnings allocated to common shares for the three months ended September 30, 2014 and 2013 were $536 million and $959 million, respectively, and for the nine months ended September 30, 2014 and 2013 were $1.373 billion and $1.973 billion, respectively.
Other, net use of cash in Net cash from operating activities in the Condensed Consolidated Statement of Cash Flows for the first nine months of 2014 and 2013 includes the effects of contributions to defined benefit plans of approximately $350 million and $680 million, respectively, and to the post-employment medical and dental benefit plans of $40 million in each nine month period, as well as the impact, in the first nine months of 2014, of approximately $165 million of cash refunded by taxing authorities, resulting from the resolution of various tax positions pertaining to prior years; and the timing of cash taxes. In 2013, Other, net also includes the recognition of $433 million of tax benefits in the third quarter as a result of the favorable resolution of various tax positions pertaining to prior years.
The components of long-term investments as of September 30, 2014 and December 31, 2013 are as follows:
|
|
September 30, |
|
December 31, |
| ||
(in millions) |
|
2014 |
|
2013 |
| ||
Equity securities |
|
$ |
195 |
|
$ |
93 |
|
Other |
|
26 |
|
26 |
| ||
Total |
|
$ |
221 |
|
$ |
119 |
|
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 |
|
Net Actuarial |
|
Cumulative |
|
Cumulative Gains |
| ||||||||||||||||
(in millions) |
|
2014 |
|
2013 |
|
2014 |
|
2013 |
|
2014 |
|
2013 |
|
2014 |
|
2013 |
| ||||||||
Balance at June 30(a) |
|
$ |
(675 |
) |
$ |
(1,137 |
) |
$ |
(1,284 |
) |
$ |
(2,158 |
) |
$ |
9 |
|
$ |
34 |
|
$ |
(2 |
) |
$ |
35 |
|
Other comprehensive income (loss) before Reclassifications |
|
(1,096 |
) |
270 |
|
|
|
(8 |
) |
2 |
|
3 |
|
67 |
|
12 |
| ||||||||
Amounts reclassified from accumulated other comprehensive income (b) |
|
|
|
|
|
16 |
|
26 |
|
(10 |
) |
(10 |
) |
(2 |
) |
(23 |
) | ||||||||
Net current period comprehensive income |
|
(1,096 |
) |
270 |
|
16 |
|
18 |
|
(8 |
) |
(7 |
) |
65 |
|
(11 |
) | ||||||||
Balance at September 30(a) |
|
$ |
(1,771 |
) |
$ |
(867 |
) |
$ |
(1,268 |
) |
$ |
(2,140 |
) |
$ |
1 |
|
$ |
27 |
|
$ |
63 |
|
$ |
24 |
|
|
|
Nine Months Ended September 30 |
| ||||||||||||||||||||||
|
|
Cumulative Foreign |
|
Net Actuarial |
|
Cumulative |
|
Cumulative Gains |
| ||||||||||||||||
(in millions) |
|
2014 |
|
2013 |
|
2014 |
|
2013 |
|
2014 |
|
2013 |
|
2014 |
|
2013 |
| ||||||||
Balance at December 31, 2013 and 2012 |
|
$ |
(718 |
) |
$ |
(79 |
) |
$ |
(1,312 |
) |
$ |
(3,596 |
) |
$ |
13 |
|
$ |
31 |
|
$ |
5 |
|
$ |
50 |
|
Separation of AbbVie (a) |
|
|
|
(308 |
) |
|
|
1,451 |
|
|
|
|
|
|
|
8 |
| ||||||||
Other comprehensive income (loss) before Reclassifications |
|
(1,053 |
) |
(480 |
) |
|
|
(77 |
) |
4 |
|
17 |
|
66 |
|
(8 |
) | ||||||||
Amounts reclassified from accumulated other comprehensive income (b) |
|
|
|
|
|
44 |
|
82 |
|
(16 |
) |
(21 |
) |
(8 |
) |
(26 |
) | ||||||||
Net current period comprehensive income (a) |
|
(1,053 |
) |
(480 |
) |
44 |
|
5 |
|
(12 |
) |
(4 |
) |
58 |
|
(34 |
) | ||||||||
Balance at September 30 |
|
$ |
(1,771 |
) |
$ |
(867 |
) |
$ |
(1,268 |
) |
$ |
(2,140 |
) |
$ |
1 |
|
$ |
27 |
|
$ |
63 |
|
$ |
24 |
|
(a) Prior year amounts have been appropriately revised to reflect a reclassification between Cumulative foreign currency translation adjustment and Net actuarial losses and prior service costs and credits.
(b) Reclassified amounts for foreign currency translation are recorded in the Condensed Consolidated Statement of Earnings as Net foreign exchange loss (gain); gains on marketable equity securities as Other (income) expense, net and cash flow hedges as Cost of products sold, excluding amortization of intangible assets. Net actuarial losses and prior service costs are included as a component of net periodic benefit plan costs; see Note 12 for additional details.
Note 6 Business Acquisitions
On September 26, 2014, Abbott completed the acquisition of the controlling interest in CFR Pharmaceuticals S.A. (CFR) for approximately $2.9 billion in cash ($2.8 billion net of CFR cash on hand at closing). Including the assumption of approximately $570 million of debt, the total cost of the acquisition was $3.4 billion. The acquisition of CFR more than doubles Abbotts branded generics pharmaceutical presence in Latin America and further expands its presence in emerging markets. CFRs financial results are included in Abbotts financial statements beginning on September 26, 2014, the date that Abbott acquired control of this business. The impact of the acquired operations on Abbotts operating results was not significant for the third quarter of 2014. Abbott owns 99.9% of the outstanding ordinary shares of CFR. The fair value of the non-controlling interest at the acquisition date was approximately $4 million. The acquisition was funded with cash and cash equivalents and short-term investments. The preliminary allocation of the fair value of the acquisition is shown in the table below. The allocation of the fair value of the acquisition will be finalized when the valuation is completed.
(in billions) |
|
|
| |
Acquired intangible assets, non-deductible |
|
$ |
1.80 |
|
Goodwill, non-deductible |
|
1.60 |
| |
Acquired net tangible assets |
|
0.10 |
| |
Deferred income taxes recorded at acquisition |
|
(0.58 |
) | |
Total preliminary allocation of fair value |
|
$ |
2.92 |
|
Acquired intangible assets consist primarily of product rights for currently marketed products and are amortized over 12 to 16 years (average of 15 years). The goodwill is primarily attributable to intangible assets that do not qualify for separate recognition. The goodwill is identifiable to the Established Pharmaceutical Products segment. The acquired tangible assets consist primarily of cash and cash equivalents of approximately $94 million, trade accounts receivable of approximately $177 million, inventory of approximately $187 million, other current assets of approximately $52 million, property and equipment of approximately $209 million, and other long-term assets of approximately $146 million. Assumed liabilities consist of borrowings of approximately $570 million, trade accounts payable and other current liabilities of approximately $185 million and other noncurrent liabilities of approximately $15 million.
Annualized net sales for CFR Pharmaceuticals are expected to total approximately $800 million. Had the acquisition of CFR Pharmaceuticals taken place on January 1, 2013, the consolidated net sales and earnings of Abbott would not have been significantly different from the reported amounts.
In August 2013, Abbott acquired 100 percent of IDEV Technologies, net of debt, for $310 million, in cash. The acquisition of IDEV Technologies expands Abbotts endovascular portfolio. The final allocation of the fair value at the date of acquisition resulted in non-deductible acquired in-process research and development of approximately $170 million which is accounted for as an indefinite-lived intangible asset until regulatory approval or discontinuation; non-deductible definite-lived intangible assets of approximately $66 million; non-deductible goodwill of approximately $112 million; and net deferred tax liabilities of $47 million. Acquired intangible assets consist of developed technology and are being amortized over 11 years.
In August 2013, Abbott acquired 100 percent of OptiMedica for $260 million, in cash, plus additional payments up to $150 million to be made upon completion of certain development, regulatory and sales milestones. The acquisition of OptiMedica provides Abbott with an immediate entry point into the laser assisted cataract surgery market. The final allocation of the fair value at the date of acquisition resulted in non-deductible definite-lived intangible assets of approximately $160 million; non-deductible acquired in-process research and development of approximately $60 million which is accounted for as an indefinite-lived intangible asset until regulatory approval or discontinuation; non-deductible goodwill of approximately $130 million; net deferred tax liabilities of $49 million; and contingent consideration of approximately $70 million. The fair value of the contingent consideration was determined based on an independent appraisal. Acquired intangible assets consist of developed technology and are being amortized over 18 years.
Note 7 - Goodwill and Intangible Assets
The total amount of goodwill reported was $10.0 billion at September 30, 2014 and $9.8 billion at December 31, 2013. In the nine months ended September 30, 2014, foreign currency translation adjustments decreased goodwill by approximately $293 million. The acquisition of CFR Pharmaceuticals increased goodwill by $1.6 billion, purchase price allocation adjustments associated with other recent acquisitions decreased goodwill by approximately $30 million, and approximately $1.0 billion of goodwill was moved to Non-current assets held for disposition due to the planned disposition of the developed markets branded generics pharmaceuticals business. The amount of goodwill related to reportable segments at September 30, 2014 was $3.4 billion for the Established Pharmaceutical
Products segment, $286 million for the Nutritional Products segment, $444 million for the Diagnostic Products segment, and $2.9 billion for the Vascular Products segment. There was no reduction of goodwill relating to impairments.
The gross amount of amortizable intangible assets, primarily product rights and technology, was $10.5 billion as of September 30, 2014 and $12.2 billion as of December 31, 2013, and accumulated amortization was $4.5 billion as of September 30, 2014 and $6.8 billion as of December 31, 2013. Indefinite-lived intangible assets, which relate to in-process research and development acquired in a business combination, was approximately $114 million at September 30, 2014 and $266 million at December 31, 2013. The acquisition of CFR Pharmaceuticals increased intangible assets by approximately $1.8 billion. Approximately $840 million of net intangible assets related to the developed markets branded generics pharmaceuticals businesses was reclassified to Non-current assets held for disposition due to the planned disposition of these businesses. Foreign currency translation adjustments decreased intangible assets by approximately $127 million. The remaining change in intangibles primarily reflects the movement of an IDEV-related intangible asset, Supera, to amortizable assets due to the receipt of regulatory approval in the first quarter of 2014. Abbotts estimated annual amortization expense for intangible assets related to continuing operations is approximately $560 million in 2014, $640 million in 2015, $610 million in 2016, $600 million in 2017 and $520 million in 2018. Amortizable intangible assets are amortized over 2 to 20 years (weighted average 12 years).
Note 8 Restructuring Plans
In the first nine months of 2014, Abbott management approved plans to streamline operations in order to reduce costs and improve efficiencies in various Abbott businesses including vascular, diagnostics and nutritional businesses. Abbott recorded employee related severance and other charges of approximately $107 million in 2014. Approximately $17 million is recognized in Cost of products sold, $41 million is recognized in Research and development and approximately $49 million is recognized in Selling, general and administrative expense. The following summarizes the activity for these restructurings:
(in millions) |
|
|
| |
Restructuring charges recorded in 2014 |
|
$ |
107 |
|
Payments and other adjustments |
|
(34 |
) | |
Accrued balance at September 30, 2014 |
|
$ |
73 |
|
In 2014 and 2013, Abbott management approved plans to reduce costs and improve efficiencies across various functional areas and in Abbotts established pharmaceuticals business. In 2012, Abbott management approved plans to streamline various commercial operations in order to reduce costs and improve efficiencies in Abbotts core diagnostics, established pharmaceuticals and nutritionals businesses. Additional charges of approximately $120 million were recognized in 2014 of which approximately $7 million is recorded in Cost of products sold, approximately $2 million in Research and development and approximately $111 million in Selling, general and administrative expense.
The following summarizes the activity for the first nine months of 2014 related to these restructuring actions and the status of the related accrual as of September 30, 2014:
(in millions) |
|
|
| |
Accrued balance at December 31, 2013 |
|
$ |
148 |
|
Restructuring charges recorded in 2014 |
|
120 |
| |
Payments and other adjustments |
|
(82 |
) | |
Accrued balance at September 30, 2014 |
|
$ |
186 |
|
In 2013 and prior years, Abbott management approved plans to realign its vascular manufacturing operations in order to reduce costs. The following summarizes the activity for the first nine months of 2014 related to these restructuring actions and the status of the related accrual as of September 30, 2014:
(in millions) |
|
|
| |
Accrued balance at December 31, 2013 |
|
$ |
20 |
|
Payments and other adjustments |
|
(2 |
) | |
Accrued balance at September 30, 2014 |
|
$ |
18 |
|
In 2011 and 2008, Abbott management approved plans to streamline global manufacturing operations, reduce overall costs, and improve efficiencies in Abbotts core diagnostics business. The following summarizes the activity for the first nine months of 2014 related to these restructuring actions and the status of the related accrual as of September 30, 2014:
(in millions) |
|
|
| |
Accrued balance at December 31, 2013 |
|
$ |
41 |
|
Payments and other adjustments |
|
(17 |
) | |
Accrued balance at September 30, 2014 |
|
$ |
24 |
|
Note 9 Incentive Stock Programs
In the first nine months of 2014, Abbott granted 3,802,651 stock options, 584,354 restricted stock awards and 5,367,732 restricted stock units under its incentive stock programs. At September 30, 2014, approximately 110 million shares were reserved for future grants. Information regarding the number of stock options outstanding and exercisable at September 30, 2014 is as follows:
|
|
Outstanding |
|
Exercisable |
| ||
Number of shares |
|
38,913,380 |
|
31,495,604 |
| ||
Weighted average remaining life (years) |
|
4.2 |
|
3.1 |
| ||
Weighted average exercise price |
|
$ |
27.55 |
|
$ |
25.46 |
|
Aggregate intrinsic value (in millions) |
|
$ |
549 |
|
$ |
511 |
|
The total unrecognized share-based compensation cost at September 30, 2014 amounted to approximately $186 million which is expected to be recognized over the next three years.
Note 10 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 notional amounts totaling approximately $1.36 billion at September 30, 2014 and approximately $140 million at December 31, 2013, 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, 2014 will be included in Cost of products sold at the time the products are sold, generally through the next twelve months. The amount of hedge ineffectiveness was not significant in 2014 and 2013.
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 and Japanese yen, 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, European currencies and Japanese yen. At September 30, 2014 and December 31, 2013, Abbott held $13.0 billion and $13.8 billion, respectively, of such foreign currency forward exchange contracts.
Abbott has designated foreign denominated short-term debt as a hedge of the net investment in a foreign subsidiary of approximately $485 million and approximately $505 million as of September 30, 2014 and December 31, 2013, respectively. Accordingly, changes in the reported value of this debt due to changes in exchange rates are recorded in Accumulated other comprehensive income (loss), net of tax.
Abbott is a party to interest rate swap contracts totaling approximately $1.5 billion at September 30, 2014 and December 31, 2013 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. No hedge ineffectiveness was recorded in income in 2014 or 2013 for these hedges.
The following table summarizes the amounts and location of certain derivative financial instruments as of September 30, 2014 and December 31, 2013:
|
|
Fair Value - Assets |
|
Fair Value - Liabilities |
| ||||||||||||
(in millions) |
|
Sept. 30, |
|
Dec. 31, |
|
Balance Sheet Caption |
|
Sept. 30, |
|
Dec. 31, |
|
Balance Sheet Caption |
| ||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Interest rate swaps designated as fair value hedges |
|
$ |
100 |
|
$ |
87 |
|
Deferred income taxes and other assets |
|
$ |
|
|
$ |
|
|
Post-employment obligations, deferred income taxes and other long-term liabilities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Foreign currency forward exchange contracts: |
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Hedging instruments |
|
61 |
|
14 |
|
Prepaid expenses, deferred income taxes, and other receivables |
|
3 |
|
|
|
Other accrued liabilities |
| ||||
Others not designated as hedges |
|
119 |
|
70 |
|
Prepaid expenses, deferred income taxes, and other receivables |
|
159 |
|
75 |
|
Other accrued liabilities |
| ||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Debt designated as a hedge of net investment in a foreign subsidiary |
|
|
|
|
|
n/a |
|
485 |
|
505 |
|
Short-term borrowings |
| ||||
|
|
$ |
280 |
|
$ |
171 |
|
|
|
$ |
647 |
|
$ |
580 |
|
|
|
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 the amounts and location of income (expense) and gain (loss) reclassified into income in the third quarter and first nine months of 2014 and 2013 and for certain other derivative financial instruments. The amount of hedge ineffectiveness was not significant in 2014 and 2013 for these hedges.
|
|
Gain (loss) Recognized in Other |
|
Income (expense) and Gain (loss) |
|
|
| ||||||||||||||||||||
|
|
Three Months |
|
Nine Months |
|
Three Months |
|
Nine Months |
|
Statement of Earnings |
| ||||||||||||||||
(in millions) |
|
2014 |
|
2013 |
|
2014 |
|
2013 |
|
2014 |
|
2013 |
|
2014 |
|
2013 |
|
Caption |
| ||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||
Foreign currency forward exchange contracts designated as cash flow hedges |
|
$ |
58 |
|
$ |
|
|
$ |
56 |
|
$ |
29 |
|
$ |
2 |
|
$ |
14 |
|
$ |
7 |
|
$ |
28 |
|
Cost of products sold |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||
Debt designated as a hedge of net investment in a foreign subsidiary |
|
38 |
|
|
|
20 |
|
75 |
|
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 |
|
(6 |
) |
10 |
|
13 |
|
(71 |
) |
Interest expense |
| ||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||
Foreign currency forward exchange contracts not designated as hedges |
|
n/a |
|
n/a |
|
n/a |
|
n/a |
|
76 |
|
(70 |
) |
50 |
|
68 |
|
Net foreign exchange loss (gain) |
| ||||||||
The interest rate swaps are designated as fair value hedges of the variability of the fair value of fixed-rate debt due to changes in the long-term benchmark interest rates. The hedged debt is marked to market, offsetting the effect of marking the interest rate swaps to market.
The carrying values and fair values of certain financial instruments as of September 30, 2014 and December 31, 2013 are shown in the following table. The carrying values of all other financial instruments approximate their estimated fair values. The counterparties to financial instruments consist of select major international financial institutions. Abbott does not expect any losses from nonperformance by these counterparties.
|
|
September 30, 2014 |
|
December 31, 2013 |
| ||||||||
(in millions) |
|
Carrying |
|
Fair |
|
Carrying |
|
Fair |
| ||||
|
|
|
|
|
|
|
|
|
| ||||
Long-term Investment Securities: |
|
|
|
|
|
|
|
|
| ||||
Equity securities |
|
$ |
195 |
|
$ |
195 |
|
$ |
93 |
|
$ |
93 |
|
Other |
|
26 |
|
18 |
|
26 |
|
24 |
| ||||
Total Long-term Debt |
|
(3,925 |
) |
(4,505 |
) |
(3,397 |
) |
(3,930 |
) | ||||
Foreign Currency Forward Exchange Contracts: |
|
|
|
|
|
|
|
|
| ||||
Receivable position |
|
180 |
|
180 |
|
84 |
|
84 |
| ||||
(Payable) position |
|
(162 |
) |
(162 |
) |
(75 |
) |
(75 |
) | ||||
Interest Rate Hedge Contracts: |
|
|
|
|
|
|
|
|
| ||||
Receivable position |
|
100 |
|
100 |
|
87 |
|
87 |
| ||||
The fair value of the debt was determined based on significant other observable inputs, including current interest rates.
The following table summarizes the bases used to measure certain assets and liabilities at fair value on a recurring basis in the balance sheet:
|
|
|
|
Basis of Fair Value Measurement |
| ||||||||
(in millions) |
|
Outstanding |
|
Quoted |
|
Significant |
|
Significant |
| ||||
September 30, 2014: |
|
|
|
|
|
|
|
|
| ||||
Equity securities |
|
$ |
3 |
|
$ |
3 |
|
$ |
|
|
$ |
|
|
Interest rate swap derivative financial instruments |
|
100 |
|
|
|
100 |
|
|
| ||||
Foreign currency forward exchange contracts |
|
180 |
|
|
|
180 |
|
|
| ||||
Total Assets |
|
$ |
283 |
|
$ |
3 |
|
$ |
280 |
|
$ |
|
|
|
|
|
|
|
|
|
|
|
| ||||
Fair value of hedged long-term debt |
|
$ |
1,625 |
|
$ |
|
|
$ |
1,625 |
|
$ |
|
|
Foreign currency forward exchange contracts |
|
162 |
|
|
|
162 |
|
|
| ||||
Contingent consideration related to business combinations |
|
78 |
|
|
|
|
|
78 |
| ||||
Total Liabilities |
|
$ |
1,865 |
|
$ |
|
|
$ |
1,787 |
|
$ |
78 |
|
|
|
|
|
|
|
|
|
|
| ||||
December 31, 2013: |
|
|
|
|
|
|
|
|
| ||||
Equity securities |
|
$ |
26 |
|
$ |
26 |
|
$ |
|
|
$ |
|
|
Interest rate swap derivative financial instruments |
|
87 |
|
|
|
87 |
|
|
| ||||
Foreign currency forward exchange contracts |
|
84 |
|
|
|
84 |
|
|
| ||||
Total Assets |
|
$ |
197 |
|
$ |
26 |
|
$ |
171 |
|
$ |
|
|
|
|
|
|
|
|
|
|
|
| ||||
Fair value of hedged long-term debt |
|
$ |
1,623 |
|
$ |
|
|
$ |
1,623 |
|
$ |
|
|
Foreign currency forward exchange contracts |
|
75 |
|
|
|
75 |
|
|
| ||||
Contingent consideration related to business combinations |
|
208 |
|
|
|
|
|
208 |
| ||||
Total Liabilities |
|
$ |
1,906 |
|
$ |
|
|
$ |
1,698 |
|
$ |
208 |
|
The fair value of the debt was determined based on the face value of the debt adjusted for the fair value of the interest rate swaps, which is based on a discounted cash flow analysis. The fair value of foreign currency forward exchange contracts is determined using a market approach, which utilizes values for comparable derivative instruments. The fair value of the contingent consideration was determined based on an independent appraisal adjusted for the time value of money, exchange, payments and other changes in fair value. The change in contingent consideration from the previous year end primarily reflects the payment of contingent consideration in the first nine months of 2014.
Note 11 Litigation and Environmental Matters
Abbott has been identified as a potentially responsible party for investigation and cleanup costs at a number of locations in the United States and Puerto Rico under federal and state remediation laws and is investigating potential contamination at a number of company-owned locations. Abbott has recorded an estimated cleanup cost for each site for which management believes Abbott has a probable
loss exposure. No individual site cleanup exposure is expected to exceed $4 million, and the aggregate cleanup exposure is not expected to exceed $15 million.
Abbott is involved in various claims and legal proceedings, and Abbott estimates the range of possible loss for its legal proceedings and environmental exposures to be from approximately $65 million to $90 million. The recorded accrual balance at September 30, 2014 for these proceedings and exposures was approximately $75 million. This accrual represents managements best estimate of probable loss, as defined by FASB ASC No. 450, Contingencies. Within the next year, legal proceedings may occur that may result in a change in the estimated loss accrued by Abbott. While it is not feasible to predict the outcome of all such proceedings and exposures with certainty, management believes that their ultimate disposition should not have a material adverse effect on Abbotts financial position, cash flows, or results of operations.
Note 12 Post-Employment Benefits
Retirement plans consist of defined benefit, defined contribution, and medical and dental plans. Net cost recognized in continuing operations for the three months and nine months ended September 30 for Abbotts major defined benefit plans and post-employment medical and dental benefit plans is as follows:
(in millions)
|
|
Defined Benefit Plans |
|
Medical and Dental Plans |
| ||||||||||||||||||||
|
|
Three Months |
|
Nine Months |
|
Three Months |
|
Nine Months |
| ||||||||||||||||
|
|
Ended Sept. 30 |
|
Ended Sept. 30 |
|
Ended Sept. 30 |
|
Ended Sept. 30 |
| ||||||||||||||||
|
|
2014 |
|
2013 |
|
2014 |
|
2013 |
|
2014 |
|
2013 |
|
2014 |
|
2013 |
| ||||||||
Service cost benefits earned during the period |
|
$ |
61 |
|
$ |
68 |
|
$ |
184 |
|
$ |
214 |
|
$ |
9 |
|
$ |
10 |
|
$ |
27 |
|
$ |
33 |
|
Interest cost on projected benefit obligations |
|
73 |
|
64 |
|
222 |
|
194 |
|
16 |
|
15 |
|
48 |
|
45 |
| ||||||||
Expected return on plan assets |
|
(109 |
) |
(108 |
) |
(330 |
) |
(291 |
) |
(10 |
) |
(9 |
) |
(29 |
) |
(27 |
) | ||||||||
Net amortization of: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||
Actuarial loss, net |
|
23 |
|
56 |
|
71 |
|
115 |
|
5 |
|
8 |
|
14 |
|
25 |
| ||||||||
Prior service cost (credit) |
|
1 |
|
(16 |
) |
2 |
|
5 |
|
(9 |
) |
(9 |
) |
(27 |
) |
(26 |
) | ||||||||
Net Cost |
|
$ |
49 |
|
$ |
64 |
|
$ |
149 |
|
$ |
237 |
|
$ |
11 |
|
$ |
15 |
|
$ |
33 |
|
$ |
50 |
|
Abbott funds its domestic defined benefit plans according to IRS funding limitations. International pension plans are funded according to similar regulations. In the first nine months of 2014 and 2013, approximately $350 million and $680 million, respectively, were contributed to defined benefit plans and $40 million was contributed to the post-employment medical and dental benefit plans in the first nine months of each fiscal year.
Note 13 Taxes on Earnings
Taxes on earnings from continuing operations reflect the estimated annual effective rates and include charges for interest and penalties, as well as the impact of changes in the Chilean tax rate. Earnings from Discontinued Operations, net of tax, in the first nine months of 2014 reflects the recognition of $101 million of net tax benefits primarily as a result of the resolution of various tax positions related to prior years. The conclusion of these tax matters decreased the gross amount of unrecognized tax benefits by approximately $134 million.
In the third quarter of 2013 taxes on earnings reflect the recognition of $241 million of tax benefits in continuing operations as the result of the favorable resolution of various tax positions pertaining to prior years. 2013 Earnings from Discontinued Operations, net of tax, reflect the recognition of $193 million of tax benefits as a result of the favorable resolution of various tax positions related to AbbVies operations prior to separation. The conclusion of these tax matters decreased the gross amount of unrecognized tax benefits by approximately $560 million. In addition, as a result of the American Taxpayer Relief Act of 2012 signed into law in January 2013, Abbott recorded a tax benefit to taxes on continuing operations of approximately $103 million in the first quarter of 2013 for the retroactive extension of the research tax credit and the look-through rules of section 954(c)(6) of the Internal Revenue Code to the beginning of 2012.
Tax authorities in various jurisdictions regularly review Abbotts income tax filings. Abbott believes that it is reasonably possible that the recorded amount of gross unrecognized tax benefits may decrease by up to $350 million, including cash adjustments, within the next twelve months as a result of concluding various domestic and international tax matters.
Note 14 Segment Information
Abbotts principal business is the discovery, development, manufacture and sale of a broad line of health care products. Abbotts products are generally sold directly to retailers, wholesalers, hospitals, health care facilities, laboratories, physicians offices and government agencies throughout the world. Abbotts reportable segments are as follows:
Established Pharmaceutical Products International sales of a broad line of branded generic pharmaceutical products.
Nutritional Products Worldwide sales of a broad line of adult and pediatric nutritional products.
Diagnostic Products Worldwide sales of diagnostic systems and tests for blood banks, hospitals, commercial laboratories and alternate-care testing sites. For segment reporting purposes, the Core Laboratories Diagnostics, Molecular Diagnostics, Point of Care and Ibis diagnostic divisions are aggregated and reported as the Diagnostic Products segment.
Vascular Products Worldwide sales of coronary, endovascular, structural heart, vessel closure and other medical device products.
Non-reportable segments include the Diabetes Care and Medical Optics segments.
On July 14, 2014, Abbott announced that it will sell its developed markets branded generics pharmaceuticals business to Mylan. This business was previously included in the Established Pharmaceutical Products segment. The segment information below, including prior period amounts, has been adjusted to reflect the classification of the developed markets branded generics pharmaceuticals business as part of discontinued operations in the Condensed Consolidated Statement of Earnings.
Abbotts underlying accounting records are maintained on a legal entity basis for government and public reporting requirements. Segment disclosures are on a performance basis consistent with internal management reporting. Intersegment transfers of inventory are recorded at standard cost and are not a measure of segment operating earnings. The cost of some corporate functions and the cost of certain employee benefits are charged to segments at predetermined rates that approximate cost. Remaining costs, if any, are not allocated to segments. In addition, intangible asset amortization is not allocated to operating segments, and intangible assets and goodwill are not included in the measure of each segments assets. The following segment information has been prepared in accordance with the internal accounting policies of Abbott, as described above, and are not presented in accordance with generally accepted accounting principles applied to the consolidated financial statements.
(in millions)
|
|
Net Sales to External Customers |
|
Operating Earnings |
| ||||||||||||||||||||
|
|
Three Months |
|
Nine Months |
|
Three Months |
|
Nine Months |
| ||||||||||||||||
|
|
Ended Sept. 30 |
|
Ended Sept. 30 |
|
Ended Sept. 30 |
|
Ended Sept. 30 |
| ||||||||||||||||
|
|
2014 |
|
2013 |
|
2014 |
|
2013 |
|
2014 |
|
2013 |
|
2014 |
|
2013 |
| ||||||||
Established Pharmaceutical Products |
|
$ |
771 |
|
$ |
691 |
|
$ |
2,196 |
|
$ |
2,136 |
|
$ |
160 |
|
$ |
141 |
|
$ |
441 |
|
$ |
423 |
|
Nutritional Products |
|
1,787 |
|
1,635 |
|
5,149 |
|
5,038 |
|
369 |
|
260 |
|
954 |
|
915 |
| ||||||||
Diagnostic Products |
|
1,180 |
|
1,125 |
|
3,486 |
|
3,349 |
|
310 |
|
250 |
|
810 |
|
752 |
| ||||||||
Vascular Products |
|
730 |
|
747 |
|
2,232 |
|
2,239 |
|
280 |
|
266 |
|
804 |
|
674 |
| ||||||||
Total Reportable Segments |
|
4,468 |
|
4,198 |
|
13,063 |
|
12,762 |
|
1,119 |
|
917 |
|
3,009 |
|
2,764 |
| ||||||||
Other |
|
636 |
|
627 |
|
1,894 |
|
1,881 |
|
|
|
|
|
|
|
|
| ||||||||
Net Sales |
|
$ |
5,104 |
|
$ |
4,825 |
|
$ |
14,957 |
|
$ |
14,643 |
|
|
|
|
|
|
|
|
| ||||
Corporate functions and benefit plans costs |
|
|
|
|
|
|
|
|
|
(76 |
) |
(117 |
) |
(237 |
) |
(364 |
) | ||||||||
Non-reportable segments |
|
|
|
|
|
|
|
|
|
126 |
|
89 |
|
294 |
|
276 |
| ||||||||
Net interest expense |
|
|
|
|
|
|
|
|
|
(17 |
) |
(21 |
) |
(53 |
) |
(64 |
) | ||||||||
Share-based compensation (a) |
|
|
|
|
|
|
|
|
|
(39 |
) |
(43 |
) |
(203 |
) |
(216 |
) | ||||||||
Amortization of intangible assets |
|
|
|
|
|
|
|
|
|
(132 |
) |
(146 |
) |
(392 |
) |
(441 |
) | ||||||||
Other, net (b) |
|
|
|
|
|
|
|
|
|
(263 |
) |
(198 |
) |
(702 |
) |
(522 |
) | ||||||||
Consolidated Earnings from Continuing Operations Before Taxes |
|
|
|
|
|
|
|
|
|
$ |
718 |
|
$ |
481 |
|
$ |
1,716 |
|
$ |
1,433 |
|
(a) Approximately 40 to 45 percent of the annual net cost of share-based awards will typically be recognized in the first quarter due to the timing of the granting of share-based awards.
(b) Amount includes administrative overhead costs previously allocated to the developed markets branded generics pharmaceuticals business as well as other support activities that will remain with Abbott. The increase in expense from 2013 to 2014 primarily reflects higher charges for cost reduction initiatives.
Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
Financial Review - Results of Operations
On July 14, 2014, Abbott announced that it will sell its developed markets branded generics pharmaceuticals business to Mylan Inc. Abbott will retain its branded generics pharmaceuticals business in emerging markets. The transaction is expected to close in the first quarter of 2015. As a result of the planned disposition of the developed markets branded generics pharmaceuticals business, the results of this business have been excluded from continuing operations and are reported as part of discontinued operations in the Condensed Consolidated Income Statement. This developed markets business was previously included as part of the Established Pharmaceutical Products segment. Prior year and year-to-date results of operations have been adjusted to report this business as discontinued operations.
The following table details sales by reportable segment for the three months and nine months ended September 30. Percent changes are versus the prior year and are based on unrounded numbers.
|
|
Net Sales to External Customers |
| ||||||||||
(in millions) |
|
Three Months |
|
Three Months |
|
Total |
|
Impact of |
|
Total Change |
| ||
|
|
|
|
|
|
|
|
|
|
|
| ||
Nutritional Products |
|
$ |
1,787 |
|
$ |
1,635 |
|
9.3 |
% |
(0.8 |
)% |
10.1 |
% |
Diagnostic Products |
|
1,180 |
|
1,125 |
|
4.9 |
|
(1.3 |
) |
6.2 |
| ||
Established Pharmaceutical Products |
|
771 |
|
691 |
|
11.5 |
|
(1.4 |
) |
12.9 |
| ||
Vascular Products |
|
730 |
|
747 |
|
(2.4 |
) |
(0.3 |
) |
(2.1 |
) | ||
Total Reportable Segments |
|
4,468 |
|
4,198 |
|
6.4 |
|
(0.9 |
) |
7.3 |
| ||
Other |
|
636 |
|
627 |
|
1.6 |
|
(0.5 |
) |
2.1 |
| ||
Net Sales from Continuing Operations |
|
$ |
5,104 |
|
$ |
4,825 |
|
5.8 |
|
(0.9 |
) |
6.7 |
|
|
|
|
|
|
|
|
|
|
|
|
| ||
Total U.S. |
|
$ |
1,577 |
|
$ |
1,587 |
|
(0.6 |
) |
|
|
(0.6 |
) |
|
|
|
|
|
|
|
|
|
|
|
| ||
Total International |
|
$ |
3,527 |
|
$ |
3,238 |
|
8.9 |
|
(1.3 |
) |
10.2 |
|
|
|
Net Sales to External Customers |
| ||||||||||
(in millions) |
|
Nine Months |
|
Nine Months |
|
Total |
|
Impact of |
|
Total Change |
| ||
|
|
|
|
|
|
|
|
|
|
|
| ||
Nutritional Products |
|
$ |
5,149 |
|
$ |
5,038 |
|
2.2 |
% |
(1.5 |
)% |
3.7 |
% |
Diagnostic Products |
|
3,486 |
|
3,349 |
|
4.1 |
|
(1.5 |
) |
5.6 |
| ||
Established Pharmaceutical Products |
|
2,196 |
|
2,136 |
|
2.9 |
|
(5.0 |
) |
7.9 |
| ||
Vascular Products |
|
2,232 |
|
2,239 |
|
(0.3 |
) |
(0.4 |
) |
0.1 |
| ||
Total Reportable Segments |
|
13,063 |
|
12,762 |
|
2.4 |
|
(1.9 |
) |
4.3 |
| ||
Other |
|
1,894 |
|
1,881 |
|
0.6 |
|
(0.6 |
) |
1.2 |
| ||
Net Sales from Continuing Operations |
|
$ |
14,957 |
|
$ |
14,643 |
|
2.1 |
|
(1.8 |
) |
3.9 |
|
|
|
|
|
|
|
|
|
|
|
|
| ||
Total U.S. |
|
$ |
4,627 |
|
$ |
4,681 |
|
(1.2 |
) |
|
|
(1.2 |
) |
|
|
|
|
|
|
|
|
|
|
|
| ||
Total International |
|
$ |
10,330 |
|
$ |
9,962 |
|
3.7 |
|
(2.6 |
) |
6.3 |
|
The net sales growth for the third quarter and first nine months of 2014 was negatively impacted by changes in foreign currency exchange rates. The relatively stronger U.S. dollar decreased total international sales by 1.3 percent for the quarter and 2.6 percent for the first nine months of 2014. Excluding the unfavorable impact of foreign exchange, total net sales increased 6.7 percent in the quarter and 3.9 percent for the first nine months, driven by higher sales across the Nutritional, Diagnostic, and Established Pharmaceutical Products segments due primarily to unit volume growth. Double-digit growth in emerging market sales was a significant contributor to the 10.2 percent increase in total international sales for the third quarter of 2014.
A comparison of significant product group sales for the nine months ended September 30 is as follows. Percent changes are versus the prior year and are based on unrounded numbers.
(in millions) |
|
September |
|
September |
|
Total |
|
Impact of |
|
Total Change |
| ||
Established Pharmaceutical Products sales |
|
|
|
|
|
|
|
|
|
|
| ||
Key Emerging Markets |
|
$ |
1,708 |
|
$ |
1,689 |
|
1.2 |
% |
(5.5 |
)% |
6.7 |
% |