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, 2010

 

OR

 

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

 

For the transition period from            to           

 

Commission File No. 1-2189

 

ABBOTT LABORATORIES

 

An Illinois Corporation

 

I.R.S. Employer Identification No.
36-0698440

 

100 Abbott Park Road

Abbott Park, Illinois 60064-6400

 

Telephone:  (847) 937-6l00

 

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

 

Accelerated Filer o

 

 

 

Non-Accelerated Filer o

 

Smaller reporting company o

(Do not check if a smaller reporting company)

 

 

 

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, 2010, Abbott Laboratories had 1,545,815,965 common shares without par value outstanding.

 

 

 



 

PART I.  FINANCIAL INFORMATION

 

Abbott Laboratories and Subsidiaries

 

Condensed Consolidated Financial Statements

 

(Unaudited)

 



 

Abbott Laboratories and Subsidiaries

 

Condensed Consolidated Statement of Earnings

 

(Unaudited)

 

(dollars and shares in thousands except per share data)

 

 

 

Three Months Ended

 

Nine Months Ended

 

 

 

September 30

 

September 30

 

 

 

2010

 

2009

 

2010

 

2009

 

Net Sales

 

$

8,674,505

 

$

7,761,336

 

$

25,198,873

 

$

21,974,580

 

 

 

 

 

 

 

 

 

 

 

Cost of products sold

 

3,741,116

 

3,360,187

 

10,620,152

 

9,425,106

 

Research and development

 

1,078,927

 

675,736

 

2,666,992

 

1,996,685

 

Acquired in-process research and development

 

 

 

75,000

 

 

Selling, general and administrative

 

2,673,277

 

2,085,660

 

7,579,095

 

6,180,857

 

Total Operating Cost and Expenses

 

7,493,320

 

6,121,583

 

20,941,239

 

17,602,648

 

 

 

 

 

 

 

 

 

 

 

Operating Earnings

 

1,181,185

 

1,639,753

 

4,257,634

 

4,371,932

 

 

 

 

 

 

 

 

 

 

 

Interest expense

 

149,102

 

134,612

 

401,791

 

395,771

 

Interest (income)

 

(15,590

)

(38,413

)

(83,293

)

(108,334

)

Net foreign exchange loss (gain)

 

(20,956

)

6

 

8,180

 

28,834

 

Other (income) expense, net

 

4,519

 

(327,827

)

(14,048

)

(1,315,231

)

Earnings Before Taxes

 

1,064,110

 

1,871,375

 

3,945,004

 

5,370,892

 

Taxes on Earnings

 

173,450

 

391,008

 

759,679

 

1,163,783

 

Net Earnings

 

$

890,660

 

$

1,480,367

 

$

3,185,325

 

$

4,207,109

 

 

 

 

 

 

 

 

 

 

 

Basic Earnings Per Common Share

 

$

0.58

 

$

0.95

 

$

2.06

 

$

2.71

 

 

 

 

 

 

 

 

 

 

 

Diluted Earnings Per Common Share

 

$

0.57

 

$

0.95

 

$

2.04

 

$

2.70

 

 

 

 

 

 

 

 

 

 

 

Cash Dividends Declared Per Common Share

 

$

0.44

 

$

0.40

 

$

1.32

 

$

1.20

 

 

 

 

 

 

 

 

 

 

 

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

 

1,545,413

 

1,546,291

 

1,546,147

 

1,546,493

 

Dilutive Common Stock Options and Awards

 

8,639

 

6,192

 

9,838

 

6,956

 

 

 

 

 

 

 

 

 

 

 

Average Number of Common Shares Outstanding Plus Dilutive Common Stock Options and Awards

 

1,554,052

 

1,552,483

 

1,555,985

 

1,553,449

 

 

 

 

 

 

 

 

 

 

 

Outstanding Common Stock Options Having No Dilutive Effect

 

66,479

 

83,576

 

29,403

 

67,391

 

 

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

 

2



 

Abbott Laboratories and Subsidiaries

 

Condensed Consolidated Statement of Cash Flows

 

(Unaudited)

 

(dollars in thousands)

 

 

 

Nine Months Ended

 

 

 

September 30

 

 

 

2010

 

2009

 

Cash Flow From (Used in) Operating Activities:

 

 

 

 

 

Net earnings

 

$

3,185,325

 

$

4,207,109

 

Adjustments to reconcile earnings to net cash from operating activities —

 

 

 

 

 

Depreciation

 

904,219

 

886,364

 

Amortization of intangible assets

 

1,010,508

 

655,793

 

Share-based compensation

 

330,236

 

307,498

 

Derecognition of a contingent liability associated with the conclusion of the TAP Pharmaceutical Products Inc. joint venture

 

 

(797,130

)

Trade receivables

 

476,209

 

510,249

 

Inventories

 

(52,884

)

(86,251

)

Other, net

 

565,849

 

(241,089

)

Net Cash From Operating Activities

 

6,419,462

 

5,442,543

 

 

 

 

 

 

 

Cash Flow From (Used in) Investing Activities:

 

 

 

 

 

Acquisitions of property and equipment

 

(723,742

)

(843,601

)

Acquisitions of businesses, net of cash acquired

 

(9,120,043

)

(1,518,903

)

Proceeds from sales of (purchases of) investment securities, net

 

1,973,697

 

(2,895,691

)

Deposit of restricted funds

 

(1,870,000

)

 

Other, net

 

(7,838

)

(3,392

)

Net Cash (Used in) Investing Activities

 

(9,747,926

)

(5,261,587

)

 

 

 

 

 

 

Cash Flow From (Used in) Financing Activities:

 

 

 

 

 

(Repayments of) proceeds from issuance of short-term debt and other

 

(1,419,671

)

2,281,073

 

Proceeds from issuance of long-term debt

 

3,000,000

 

3,000,000

 

Payments of long-term debt

 

(1,254

)

(2,483,176

)

Purchases of common shares

 

(866,173

)

(825,386

)

Proceeds from stock options exercised, including tax benefit

 

272,045

 

321,819

 

Dividends paid

 

(1,979,374

)

(1,795,684

)

Net Cash (Used in) From Financing Activities

 

(994,427

)

498,646

 

 

 

 

 

 

 

Effect of exchange rate changes on cash and cash equivalents

 

(668,303

)

84,291

 

 

 

 

 

 

 

Net (Decrease) Increase in Cash and Cash Equivalents

 

(4,991,194

)

763,893

 

Cash and Cash Equivalents, Beginning of Year

 

8,809,339

 

4,112,022

 

Cash and Cash Equivalents, End of Period

 

$

3,818,145

 

$

4,875,915

 

 

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

 

3



 

Abbott Laboratories and Subsidiaries

 

Condensed Consolidated Balance Sheet

 

(Unaudited)

 

(dollars in thousands)

 

 

 

September 30
2010

 

December 31
2009

 

Assets

 

 

 

 

 

Current Assets:

 

 

 

 

 

Cash and cash equivalents

 

$

3,818,145

 

$

8,809,339

 

Investments, primarily time deposits and certificates of deposit

 

31,806

 

1,122,709

 

Restricted funds, primarily U.S. treasury bills

 

1,871,807

 

 

Trade receivables, less allowances of $330,469 in 2010 and $311,546 in 2009

 

6,248,908

 

6,541,941

 

Inventories:

 

 

 

 

 

Finished products

 

2,025,154

 

2,289,280

 

Work in process

 

705,676

 

448,487

 

Materials

 

577,928

 

527,110

 

Total inventories

 

3,308,758

 

3,264,877

 

Prepaid expenses, deferred income taxes and other receivables

 

4,167,996

 

3,575,025

 

Total Current Assets

 

19,447,420

 

23,313,891

 

Investments

 

255,153

 

1,132,866

 

Property and Equipment, at Cost

 

17,259,216

 

16,486,906

 

Less: accumulated depreciation and amortization

 

9,319,429

 

8,867,417

 

Net Property and Equipment

 

7,939,787

 

7,619,489

 

Intangible Assets, net of amortization

 

12,646,677

 

6,291,989

 

Goodwill

 

15,807,536

 

13,200,174

 

Deferred Income Taxes and Other Assets

 

1,277,047

 

858,214

 

 

 

$

57,373,620

 

$

52,416,623

 

Liabilities and Shareholders’ Investment

 

 

 

 

 

Current Liabilities:

 

 

 

 

 

Short-term borrowings

 

$

3,587,830

 

$

4,978,438

 

Trade accounts payable

 

1,531,720

 

1,280,542

 

Salaries, wages and commissions and dividends payable

 

1,693,496

 

1,738,050

 

Other accrued liabilities

 

5,677,368

 

4,399,137

 

Income taxes payable

 

874,915

 

442,140

 

Current portion of long-term debt

 

2,218,542

 

211,182

 

Total Current Liabilities

 

15,583,871

 

13,049,489

 

 

 

 

 

 

 

Long-term Debt

 

12,910,681

 

11,266,294

 

Post-employment Obligations and Other Long-term Liabilities

 

7,396,344

 

5,202,111

 

Commitments and Contingencies

 

 

 

 

 

Shareholders’ Investment:

 

 

 

 

 

Preferred shares, one dollar par value
Authorized — 1,000,000 shares, none issued

 

 

 

Common shares, without par value
Authorized — 2,400,000,000 shares
Issued at stated capital amount -
Shares: 2010: 1,618,549,245; 2009: 1,612,683,987

 

8,624,344

 

8,257,873

 

Common shares held in treasury, at cost —
Shares: 2010: 72,733,280; 2009: 61,516,398

 

(3,918,310

)

(3,310,347

)

Earnings employed in the business

 

18,181,133

 

17,054,027

 

Accumulated other comprehensive income (loss)

 

(1,483,235

)

854,074

 

Total Abbott Shareholders’ Investment

 

21,403,932

 

22,855,627

 

Noncontrolling Interests in Subsidiaries

 

78,792

 

43,102

 

Total Equity

 

21,482,724

 

22,898,729

 

 

 

$

57,373,620

 

$

52,416,623

 

 

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

 

4



 

Abbott Laboratories and Subsidiaries

 

Notes to Condensed Consolidated Financial Statements

 

September 30, 2010

 

(Unaudited)

 

Note 1 — Basis of Presentation

 

The accompanying unaudited, condensed consolidated financial statements have been prepared pursuant to rules and regulations of the Securities and Exchange Commission and, therefore, do not include all information and footnote disclosures normally included in audited financial statements.  However, in the opinion of management, all adjustments (which include only normal adjustments) necessary to present fairly the results of operations, financial position and cash flows have been made.  It is suggested that these statements be read in conjunction with the financial statements included in Abbott’s Annual Report on Form 10-K for the year ended December 31, 2009.

 

The consolidated financial statements include the accounts of the parent company and subsidiaries after elimination of intercompany transactions. The accounts of foreign subsidiaries are consolidated as of August 31, due to the time needed to consolidate these subsidiaries.  In September 2010, a foreign subsidiary acquired Piramal Healthcare Limited’s Healthcare Solutions business.  This acquisition was recorded in the September 30, 2010 Condensed Consolidated Balance Sheet due to the significance of the amount of the acquisition.  In addition, in September 2010, Abbott management approved a restructuring plan that affects international operations.  Due to the significance of the amount, the restructuring charge was recorded in the third quarter 2010.

 

Note 2 — Supplemental Financial Information

 

Unvested restricted stock units 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.  Net earnings allocated to common shares for the three months and nine months ended September 30, 2010 were $889 million and $3.177 billion, respectively, and net earnings allocated to common shares for the three months and nine months ended September 30, 2009 were $1.476 billion and $4.196 billion, respectively.

 

Other (income) expense, net, for the third quarter and first nine months of 2009 includes a $287 million gain from the settlement reached between Abbott and Medtronic, Inc. resolving all outstanding intellectual property litigation between the two parties.  Other (income) expense, net, for the first nine months of 2009 includes the derecognition of a contingent liability of $797 million associated with the conclusion of the TAP joint venture and income from the recording of certain investments at fair value in connection with business acquisitions.  Other (income) expense, net, for the third quarter and first nine months of 2010 and 2009 includes ongoing contractual payments from Takeda associated with the conclusion of the TAP joint venture.

 

Other, net in Net cash from operating activities for 2010 and 2009 includes the effects of contributions to defined benefit plans of approximately $510 million and $790 million, respectively, and to the post-employment medical and dental benefit plans of $66 million and $13 million, respectively.

 

The judgment entered by the U.S. District Court for the Eastern District of Texas against Abbott in its litigation with New York University and Centocor, Inc. requires Abbott to secure the judgment in the event that its appeal to the Federal Circuit court is unsuccessful in overturning the district court’s decision.  In the first quarter of 2010, Abbott deposited $1.87 billion with an escrow agent and considers these assets to be restricted.

 

The components of long-term investments as of September 30, 2010 and December 31, 2009 are as follows:

 

 

 

Sept. 30

 

Dec. 31

 

(dollars in millions)

 

2010

 

2009

 

Equity securities

 

$

191

 

$

153

 

Note receivable from Boston Scientific, 4% interest

 

 

880

 

Other

 

64

 

100

 

Total

 

$

255

 

$

1,133

 

 

Under a registration statement filed with the Securities and Exchange Commission in February 2009, Abbott issued $3.0 billion of long-term debt in the second quarter of 2010 that matures in 2015, 2020 and 2040 with interest rates of 2.7 percent, 4.125 percent and 5.3 percent, respectively.

 

5



 

Notes to Condensed Consolidated Financial Statements

September 30, 2010

(Unaudited), continued

 

Note 3 — Taxes on Earnings

 

Taxes on earnings reflect the estimated annual effective rates and include charges for interest and penalties. The effective tax rates are less than the statutory U.S. federal income tax rate principally due to the benefit of lower statutory tax rates and tax exemptions in several foreign taxing jurisdictions.  As a result of the Patient Protection and Affordable Care Act and the Health Care and Education Reconciliation Act which were signed into law in the first quarter of 2010, Abbott recorded a charge of approximately $60 million in the first quarter 2010 to reduce deferred tax assets associated with retiree health care liabilities related to the Medicare Part D retiree drug subsidy.

 

Note 4 — 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 $3 million, and the aggregate cleanup exposure is not expected to exceed $15 million.

 

There are a number of patent disputes with third parties who claim Abbott’s products infringe their patents.  In April 2007, New York University (NYU) and Centocor, Inc. filed a lawsuit in the Eastern District of Texas asserting that HUMIRA infringes a patent co-owned by NYU and Centocor and exclusively licensed to Centocor.  In June 2009, a jury found that Abbott had willfully infringed the patent and awarded NYU and Centocor approximately $1.67 billion in past compensatory damages.  In October 2009, the district court overturned the jury’s finding that Abbott’s infringement was willful, but denied Abbott’s request to overturn the jury’s verdict on validity, infringement, and damages.  In December 2009, the district court issued a final judgment and awarded the plaintiffs an additional $175 million in prejudgment interest.  Abbott has appealed the jury’s verdict.  Abbott is confident in the merits of its case and believes that it will prevail on appeal.  As a result, no reserves have been recorded in this case.  Abbott’s acquisition of Kos Pharmaceuticals Inc. resulted in the assumption of various cases and investigations and Abbott has recorded a reserve.

 

There are several civil actions pending brought by individuals or entities that allege generally that Abbott and numerous pharmaceutical companies reported false or misleading pricing information relating to the average wholesale price of certain pharmaceutical products in connection with federal, state and private reimbursement.  Civil actions have also been brought against Abbott, and in some cases other members of the pharmaceutical industry, by state attorneys general seeking to recover alleged damages on behalf of state Medicaid programs.  In May 2006, Abbott was notified that the U.S. Department of Justice intervened in a civil whistle-blower lawsuit alleging that Abbott inflated prices for Medicaid and Medicare reimbursable drugs.  Abbott has settled a few of the cases and recorded reserves for its estimated losses in other cases. Abbott is unable to estimate the range or amount of possible loss for some of the remaining cases, and no loss reserves have been recorded for them.  Many of the products involved in these cases are Hospira products.  Hospira, Abbott’s former hospital products business, was spun off to Abbott’s shareholders in 2004. Abbott retained liability for losses that result from these cases and investigations to the extent any such losses both relate to the sale of Hospira’s products prior to the spin-off of Hospira and relate to allegations that were made in such pending and future cases and investigations that were the same as allegations existing at the date of the spin-off.

 

Within the next year, legal proceedings may occur that may result in a change in the estimated reserves recorded by Abbott.  For its legal proceedings and environmental exposures, except as noted above, Abbott estimates the range of possible loss to be from approximately $245 million to $290 million.  The recorded reserve balance at September 30, 2010 for these proceedings and exposures was approximately $265 million.  These reserves represent management’s best estimate of probable loss, as defined by FASB ASC No. 450, “Contingencies.”

 

While it is not feasible to predict the outcome of all such proceedings and exposures with certainty, management believes that their ultimate disposition should not have a material adverse effect on Abbott’s financial position, cash flows, or results of operations, except for the patent case discussed in the second paragraph of this footnote, the resolution of which could be material to cash flows or results of operations.

 

6



 

Notes to Condensed Consolidated Financial Statements

September 30, 2010

(Unaudited), continued

 

Note 5 — Post-Employment Benefits

 

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

 

 

 

Defined Benefit Plans

 

Medical and Dental Plans

 

 

 

Three Months

 

Nine Months

 

Three Months

 

Nine Months

 

 

 

Ended Sept. 30

 

Ended Sept. 30

 

Ended Sept. 30

 

Ended Sept. 30

 

(dollars in millions)

 

2010

 

2009

 

2010

 

2009

 

2010

 

2009

 

2010

 

2009

 

Service cost — benefits earned during the period

 

$

77

 

$

61

 

$

234

 

$

181

 

$

17

 

$

10

 

$

45

 

$

33

 

Interest cost on projected benefit obligations

 

117

 

89

 

351

 

277

 

24

 

19

 

76

 

71

 

Expected return on plans’ assets

 

(155

)

(128

)

(453

)

(383

)

(9

)

(6

)

(23

)

(18

)

Net amortization

 

28

 

12

 

83

 

49

 

2

 

(2

)

13

 

7

 

Net Cost

 

$

67

 

$

34

 

$

215

 

$

124

 

$

34

 

$

21

 

$

111

 

$

93

 

 

Abbott funds its domestic defined benefit plans according to IRS funding limitations.  In the first nine months of 2010 and 2009, $510 million and $790 million, respectively, was contributed to defined benefit plans and $66 million and $13 million, respectively, was contributed to the post-employment medical and dental benefit plans.

 

Note 6 — Comprehensive Income, net of tax

 

 

 

Three Months Ended

 

Nine Months Ended

 

 

 

September 30

 

September 30

 

(dollars in millions)

 

2010

 

2009

 

2010

 

2009

 

Foreign currency translation gain (loss) adjustments

 

$

1,153

 

$

485

 

$

(2,573

)

$

1,649

 

Unrealized gains on marketable equity securities

 

4

 

8

 

1

 

11

 

Amortization of net actuarial losses and prior service cost and credits

 

20

 

8

 

63

 

38

 

Net adjustments for derivative instruments designated as cash flow hedges

 

(30

)

5

 

172

 

(35

)

Other comprehensive income (loss), net of tax

 

1,147

 

506

 

(2,337

)

1,663

 

Net Earnings

 

891

 

1,480

 

3,185

 

4,207

 

Comprehensive Income

 

$

2,038

 

$

1,986

 

$

848

 

$

5,870

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Sept. 30
2010

 

Dec. 31
2009

 

 

 

 

 

 

 

 

 

 

 

Supplemental Comprehensive Income Information, net of tax:

 

 

 

 

 

 

 

 

 

Cumulative foreign currency translation (gain) adjustments

 

 

 

 

 

$

(462

)

$

(3,035

)

Cumulative unrealized (gains) on marketable equity securities

 

 

 

 

 

(25

)

(24

)

Net actuarial losses and prior service cost and credits

 

 

 

 

 

2,098

 

2,161

 

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

 

 

 

 

 

(128

)

44

 

 

7



 

Notes to Condensed Consolidated Financial Statements

September 30, 2010

(Unaudited), continued

 

Note 7 — Segment Information

 

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

 

Pharmaceutical Products — Worldwide sales of a broad line of pharmaceuticals.  For segment reporting purposes, three pharmaceutical divisions are aggregated and reported as the Pharmaceutical Products segment.

 

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, three diagnostic divisions are aggregated and reported as the Diagnostic Products segment.

 

Vascular Products — Worldwide sales of coronary, endovascular, vessel closure and other products.

 

Abbott’s underlying accounting records are maintained on a legal entity basis for government and public reporting requirements.  Segment disclosures are on a performance basis consistent with internal management reporting.  Intersegment transfers of inventory are recorded at standard cost and are not a measure of segment operating earnings.  The cost of some corporate functions and the cost of certain employee benefits are charged to segments at predetermined rates that approximate cost.  Remaining costs, if any, are not allocated to segments.  For acquisitions prior to 2006, substantially all intangible assets and related amortization are not allocated to segments.  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.

 

 

 

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

 

(dollars in millions)

 

2010

 

2009

 

2010

 

2009

 

2010

 

2009

 

2010

 

2009

 

Pharmaceutical Products

 

$

4,937

 

$

4,055

 

$

13,955

 

$

11,637

 

$

1,889

 

$

1,547

 

$

5,041

 

$

4,406

 

Nutritional Products

 

1,365

 

1,386

 

4,099

 

3,851

 

164

 

241

 

591

 

636

 

Diagnostic Products

 

916

 

909

 

2,779

 

2,603

 

137

 

116

 

442

 

306

 

Vascular Products

 

790

 

666

 

2,372

 

1,968

 

261

 

147

 

686

 

445

 

Total Reportable Segments

 

8,008

 

7,016

 

23,205

 

20,059

 

2,451

 

2,051

 

6,760

 

5,793

 

Other

 

667

 

745

 

1,994

 

1,916

 

 

 

 

 

 

 

 

 

Net Sales

 

$

8,675

 

$

7,761

 

$

25,199

 

$

21,975

 

 

 

 

 

 

 

 

 

Corporate functions and benefit plans costs

 

 

 

 

 

 

 

 

 

(114

)

(63

)

(455

)

(264

)

Non-reportable segments

 

 

 

 

 

 

 

 

 

(38

)

47

 

166

 

219

 

Net interest expense

 

 

 

 

 

 

 

 

 

(134

)

(96

)

(318

)

(287

)

Acquired in-process research and development

 

 

 

 

 

 

 

 

 

 

 

(75

)

 

Share-based compensation (a)

 

 

 

 

 

 

 

 

 

(73

)

(63

)

(330

)

(307

)

Other, net (b)

 

 

 

 

 

 

 

 

 

(1,028

)

(5

)

(1,803

)

217

 

Consolidated Earnings Before Taxes

 

 

 

 

 

 

 

 

 

$

1,064

 

$

1,871

 

$

3,945

 

$

5,371

 

 


(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)

Other, net, for the third quarter and nine months ended September 30, 2010, includes charges of $436 for restructurings and $189 for the impairment of the intangible asset related to sibutramine. Other, net, for the third quarter and nine months ended September 30, 2009, includes a $287 gain from a patent litigation settlement. Other, net, for the nine months ended September 30, 2009, includes the derecognition of a contingent liability of $797 established in connection with the conclusion of the TAP joint venture.

 

8



 

Notes to Condensed Consolidated Financial Statements

September 30, 2010

(Unaudited), continued

 

Note 8 — Incentive Stock Program

 

In the first nine months of 2010, Abbott granted 1,597,276 stock options, 447,391 replacement stock options, 1,850,500 restricted stock awards and 5,916,964 restricted stock units under this program.  At September 30, 2010, approximately 200 million shares were reserved for future grants.  Information regarding the number of options outstanding and exercisable at September 30, 2010 is as follows:

 

 

 

Outstanding

 

Exercisable

 

Number of shares

 

111,385,604

 

102,206,547

 

Weighted average remaining life (years)

 

5.1

 

4.8

 

Weighted average exercise price

 

$

50.38

 

$

49.97

 

Aggregate intrinsic value (in millions)

 

$

392

 

$

391

 

 

The total unrecognized share-based compensation cost at September 30, 2010 amounted to approximately $330 million which is expected to be recognized over the next three years.

 

Note 9 — Business Acquisitions

 

On September 8, 2010, Abbott acquired Piramal Healthcare Limited’s Healthcare Solutions business, a leader in the Indian branded generics market, for $2.2 billion, in cash, plus additional payments of $400 million annually in 2011, 2012, 2013 and 2014.  Abbott recorded a $1.5 billion liability for the present value of the additional payments at the acquisition date.  The accounts of Abbott’s foreign subsidiaries are consolidated as of August 31, but due to the significance of the amount, the acquisition was recorded in the September 30, 2010 Condensed Consolidated Balance Sheet.  The acquisition was financed with current cash.  The preliminary allocation of the fair value of the acquisition resulted in the recording of $1.0 billion of goodwill and $2.6 billion of acquired intangible assets.  Acquired intangible assets consist primarily of trade names and associated rights and customer relationships and will be amortized over 2 to 21 years (average of 20 years).  The allocation of the fair value of the acquisition will be finalized when the valuation is completed.

 

In February 2010, Abbott acquired Solvay’s pharmaceuticals business (Solvay Pharmaceuticals) for approximately $6.1 billion, in cash, plus additional payments of up to EUR 100 million per year if certain sales milestones are met in 2011, 2012 and 2013.  Contingent consideration of approximately $290 million was recorded based on a preliminary valuation.  The acquisition of Solvay Pharmaceuticals provides Abbott with a large and complementary portfolio of pharmaceutical products and expands Abbott’s presence in key global emerging markets.  Abbott acquired control of this business on February 15, 2010 and the financial results of the acquired operations are included in these financial statements beginning on that date. Net sales for the acquired operations for the third quarter and first nine months of 2010 were approximately $900 million and $2.0 billion, respectively.  Pretax loss of the acquired operations, including acquisition, integration and restructuring expenses, for the third quarter and first nine months of 2010 were approximately $365 million and $435 million, respectively.  The acquisition was funded with current cash and short-term investments.  The preliminary allocation of the fair value of the acquisition is shown in the table below (in billions of dollars).  The allocation of the fair value of the acquisition will be finalized when the valuation is completed.

 

Goodwill, non-deductible

 

$

2.0

 

Acquired intangible assets, non-deductible

 

4.2

 

Acquired in-process research and development, non-deductible

 

0.5

 

Acquired net tangible assets

 

0.8

 

Deferred income taxes recorded at acquisition

 

(1.1

)

Total preliminary allocation of fair value

 

$

6.4

 

 

9



 

Notes to Condensed Consolidated Financial Statements

September 30, 2010

(Unaudited), continued

 

Acquired intangible assets consist primarily of product rights for currently marketed products and are amortized over 2 to 14 years (average of 11 years).  Acquired in-process research and development is accounted for as indefinite lived intangible assets until regulatory approval or discontinuation.  The net tangible assets acquired consist primarily of trade accounts receivable of approximately $695 million, inventory of approximately $420 million, property and equipment of approximately $710 million, net of assumed liabilities, primarily trade accounts payable, accrued compensation and other liabilities.

 

The following unaudited pro forma financial information reflects the consolidated results of operations of Abbott as if the acquisition of Solvay Pharmaceuticals had taken place on January 1, 2010 and January 1, 2009.  The pro forma information includes adjustments for amortization of intangible assets and fair value adjustments to acquisition-date inventory as well as acquisition, integration and restructuring expenses.  The pro forma financial information is not necessarily indicative of the results of operations as they would have been had the transaction been effected on the assumed date. (in billions of dollars, except per share amounts)

 

 

 

 

Three Months Ended
September 30

 

Nine Months Ended
September 30

 

 

 

2010

 

2009

 

2010

 

2009

 

Net sales

 

$

8.7

 

$

8.6

 

$

25.8

 

$

24.3

 

Net earnings

 

0.9

 

1.1

 

3.2

 

3.6

 

Diluted earnings per common share

 

0.57

 

0.70

 

2.04

 

2.33

 

 

In March 2010, Abbott acquired STARLIMS Technologies for approximately $100 million, in cash, net of cash held by STARLIMS, providing Abbott with leading products and expertise to build its position in laboratory informatics.  A substantial portion of the fair value of the acquisition has been allocated to amortizable intangible assets and goodwill. The allocation of the fair value of the acquisition will be finalized when the valuation is completed.

 

In April 2010, Abbott acquired the outstanding shares of Facet Biotech Corporation for approximately $430 million, in cash, net of cash held by Facet.  The acquisition enhances Abbott’s early- and mid-stage pharmaceutical pipeline, including a biologic for multiple sclerosis and compounds that complement Abbott’s oncology program.  A substantial portion of the fair value of the acquisition has been allocated to acquired in-process research and development that is accounted for as an indefinite-lived intangible asset until regulatory approval or discontinuation.  The allocation of the fair value of the acquisition will be finalized when the valuation is completed.

 

In February 2009, Abbott acquired the outstanding shares of Advanced Medical Optics, Inc. (AMO) for approximately $1.4 billion in cash, net of cash held by AMO. Prior to the acquisition, Abbott held a small investment in AMO. Abbott acquired AMO to take advantage of increasing demand for vision care technologies due to population growth and demographic shifts and AMO’s premier position in its field. Abbott acquired control of this business on February 25, 2009 and the financial results of the acquired operations are included in these financial statements beginning on that date. The acquisition was financed with long-term debt. The allocation of the fair value of the acquisition is shown in the table below: (dollars in billions)

 

Goodwill, non-deductible

 

$

1.7

 

Acquired intangible assets, non-deductible

 

0.9

 

Acquired in-process research and development, non-deductible

 

0.2

 

Acquired net tangible assets

 

0.4

 

Acquired debt

 

(1.5

)

Deferred income taxes recorded at acquisition

 

(0.3

)

Total allocation of fair value

 

$

1.4

 

 

Acquired intangible assets consist of established customer relationships, developed technology and trade names and are amortized over 2 to 30 years (average of 15 years). Acquired in-process research and development is accounted for as an indefinite-lived intangible asset until regulatory approval or discontinuation. The net tangible assets acquired consist primarily of trade accounts receivable, inventory, property and equipment and other assets, net of assumed liabilities, primarily trade accounts payable, accrued compensation and other liabilities. In addition, subsequent to the acquisition, Abbott repaid substantially all of the acquired debt of AMO.

 

10



 

Notes to Condensed Consolidated Financial Statements

September 30, 2010

(Unaudited), continued

 

In January 2009, Abbott acquired Ibis Biosciences, Inc. (Ibis) for $175 million, in cash, to expand Abbott’s position in molecular diagnostics for infectious disease. Including a $40 million investment in Ibis in 2008, Abbott acquired 100 percent of the outstanding shares of Ibis. A substantial portion of the fair value of the acquisition has been allocated to goodwill and amortizable intangible assets, and acquired in-process research and development that is accounted for as an indefinite-lived intangible asset until regulatory approval or discontinuation. The investment in Ibis in 2008 resulted in a charge to acquired in-process research and development. In connection with the acquisition, the carrying amount of this investment was revalued to fair value resulting in recording $33 million of income, which is reported as Other (income) expense, net.

 

The allocation of the fair value of the 2009 acquisitions of Visiogen, Inc. and Evalve, Inc. will be completed when the valuations are completed.

 

Except for the acquisition of Solvay Pharmaceuticals, had the above acquisitions taken place on January 1 of the previous year, consolidated net sales and income would not have been significantly different from reported amounts.

 

Note 10 — Acquired In-process Research and Development

 

In the second quarter of 2010, Abbott entered into an agreement to develop and commercialize a product for the treatment of endometriosis resulting in a charge to acquired in-process research and development of $75 million.  Additional payments of approximately $500 million could be required for the achievement of certain development, regulatory and commercial milestones.

 

In September 2010, Abbott entered into an agreement to acquire licensing rights outside the U.S., excluding certain Asian markets, to a product in development for the treatment of chronic kidney disease.  This agreement is expected to result in a charge to acquired in-process research and development in the fourth quarter of 2010.

 

Note 11 — Financial Instruments, Derivatives and Fair Value Measures

 

Certain Abbott foreign subsidiaries enter into foreign currency forward exchange contracts to manage exposures to changes in foreign exchange rates for anticipated intercompany purchases by those subsidiaries whose functional currencies are not the U.S. dollar.  These contracts, totaling $426 million and $2.0 billion at September 30, 2010 and December 31, 2009, respectively, are designated as cash flow hedges of the variability of the cash flows due to changes in foreign exchange rates.  Accumulated gains and losses as of September 30, 2010 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 2010 and 2009 for these hedges.

 

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, 2010 and December 31, 2009, Abbott held $9.8 billion and $7.5 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 $630 million and approximately $575 million as of September 30, 2010 and December 31, 2009, respectively.  Accordingly, changes in the fair value of this debt due to changes in exchange rates are recorded in Accumulated other comprehensive income (loss), net of tax.

 

11



 

Notes to Condensed Consolidated Financial Statements

September 30, 2010

(Unaudited), continued

 

Abbott is a party to interest rate swap contracts totaling $7.3 billion and $5.5 billion at September 30, 2010 and December 31, 2009, respectively, to manage its exposure to changes in the fair value of $7.3 billion and $5.5 billion, respectively, of fixed-rate debt due 2011 through 2020.  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 2010 or 2009 for these hedges.

 

The following table summarizes the amounts and location of certain derivative financial instruments as of September 30, 2010 and December 31, 2009:

 

 

 

Fair Value - Assets

 

Fair Value - Liabilities

 

(dollars in millions)

 

Sept. 30
2010

 

Dec. 31
2009

 

Balance Sheet Caption

 

Sept. 30
2010

 

Dec. 31
2009

 

Balance Sheet Caption

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest rate swaps designated as fair value hedges

 

$

452

 

$

80

 

Deferred income taxes and other assets

 

$

 

$

218

 

Post-employment obligations and other long-term liabilities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest rate swaps designated as fair value hedges

 

8

 

 

Prepaid expenses, deferred income taxes and other receivables

 

 

 

n/a

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Foreign currency forward exchange contracts —

 

 

 

 

 

 

 

 

 

 

 

 

 

Hedging instruments

Others not designated as hedges

 

26
167

 


31

 

Prepaid expenses, deferred income taxes and other receivables

 


46

 

27
87

 

Other accrued liabilities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

 

 

 

n/a

 

630

 

575

 

Short-term borrowings

 

 

 

$

653

 

$

111

 

 

 

$

676

 

$

907

 

 

 

 

12



 

Notes to Condensed Consolidated Financial Statements

September 30, 2010

(Unaudited), continued

 

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 2010 and 2009 and for certain other derivative financial instruments.  The amount of hedge ineffectiveness was not significant in 2010 and 2009 for these hedges.

 

 

 

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

 

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

 

 

 

 

 

Three Months
Ended Sept. 30

 

Nine Months
 Ended Sept. 30

 

Three Months
Ended Sept. 30

 

Nine Months
 Ended Sept. 30

 

Income Statement

 

(dollars in millions)

 

2010

 

2009

 

2010

 

2009

 

2010

 

2009

 

2010

 

2009

 

Caption

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Foreign currency forward exchange contracts designated as cash flow hedges

 

$

69

 

$

(36

)

$

130

 

$

(53

)

$

26

 

$

(15

)

$

26

 

$

(20

)

Cost of products sold

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

 

(34

)

(32

)

(60

)

 

 

 

 

 

n/a

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest rate swaps designated as fair value hedges

 

n/a

 

n/a

 

n/a

 

n/a

 

272

 

196

 

598

 

(132

)

Interest expense

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Foreign currency forward exchange contracts not designated as hedges

 

n/a

 

n/a

 

n/a

 

n/a

 

(22

)

8

 

62

 

(3

)

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, 2010 and December 31, 2009 are shown in the table below. 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 2010

 

December 31 2009

 

(dollars in millions)

 

Carrying
Value

 

Fair
Value

 

Carrying
Value

 

Fair
Value

 

Long-term Investments:

 

 

 

 

 

 

 

 

 

Available-for-sale equity securities

 

$

191

 

$

191

 

$

153

 

$

153

 

Note receivable

 

 

 

880

 

925

 

Other

 

64

 

57

 

100

 

79

 

Total Long-term Debt

 

(15,129

)

(16,071

)

(11,477

)

(12,304

)

Foreign Currency Forward Exchange Contracts:

 

 

 

 

 

 

 

 

 

Receivable position

 

193

 

193

 

31

 

31

 

(Payable) position

 

(46

)

(46

)

(114

)

(114

)

Interest Rate Hedge Contracts:

 

 

 

 

 

 

 

 

 

Receivable position

 

460

 

460

 

80

 

80

 

(Payable) position

 

 

 

(218

)

(218

)

 

13



 

Notes to Condensed Consolidated Financial Statements

September 30, 2010

(Unaudited), continued

 

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

 

(dollars in millions)

 

Outstanding
Balances

 

Quoted Prices
in Active
Markets

 

Significant
Other
Observable
Inputs

 

Significant
Unobservable
Inputs

 

September 30, 2010:

 

 

 

 

 

 

 

 

 

 

 

 

 

Equity and other securities

 

$

79

 

$

79

 

$

 

$

 

Interest rate swap derivative financial instruments

 

460

 

 

460

 

 

Foreign currency forward exchange contracts

 

193

 

 

193

 

 

Total Assets

 

$

732

 

$

79

 

$

653

 

$

 

 

 

 

 

 

 

 

 

 

 

Fair value of hedged long-term debt

 

$

7,819

 

$

 

$

7,819

 

$

 

Foreign currency forward exchange contracts

 

46

 

 

46

 

 

Contingent consideration related to business combinations

 

460

 

 

 

460

 

Total Liabilities

 

$

8,325

 

$

 

$

7,865

 

$

460

 

 

 

 

 

 

 

 

 

 

 

December 31, 2009:

 

 

 

 

 

 

 

 

 

Equity and other securities

 

$

104

 

$

75

 

$

 

$

29

 

Interest rate swap derivative financial instruments

 

80

 

 

80

 

 

Foreign currency forward exchange contracts

 

31

 

 

31

 

 

Total Assets

 

$

215

 

$

75

 

$

111

 

$

29

 

 

 

 

 

 

 

 

 

 

 

Fair value of hedged long-term debt

 

$

5,362

 

$

  —

 

$

5,362

 

$

 

Interest rate swap derivative financial instruments

 

218

 

 

218

 

 

Foreign currency forward exchange contracts

 

114

 

 

114

 

 

Total Liabilities

 

$

5,694

 

$

 

$

5,694

 

$

 

 

The fair value of the contingent consideration was determined based on an independent appraisal adjusted during the period for the time value of money.

 

Note 12 — Goodwill and Intangible Assets

 

Abbott recorded goodwill of approximately $3.3 billion in 2010 related to the acquisitions of Solvay Pharmaceuticals, Piramal Healthcare Limited’s Healthcare Solutions business, STARLIMS Technologies and Facet Biotech.  In addition, in the first quarter of 2010, Abbott paid $250 million to Boston Scientific as a result of the approval to market the Xience V drug-eluting stent in Japan, resulting in an increase in goodwill.  Abbott recorded goodwill of approximately $1.7 billion in 2009 related to the acquisitions of Advanced Medical Optics, Inc. and Ibis Biosciences, Inc.  Goodwill related to the Solvay Pharmaceuticals and Piramal acquisitions was allocated to the Pharmaceutical Products segment, goodwill related to the Boston Scientific payment was allocated to the Vascular Products segment and goodwill associated with the Ibis acquisition was allocated to the Diagnostic Products segment.  Foreign currency translation adjustments and other adjustments decreased goodwill in the first nine months of 2010 by approximately $920 million and increased goodwill by approximately $725 million in the first nine months of 2009.  The amount of goodwill related to reportable segments at September 30, 2010 was $9.1 billion for the Pharmaceutical Products segment, $208 million for the Nutritional Products segment, $383 million for the Diagnostic Products segment and $2.7 billion for the Vascular Products segment.  There were no significant reductions of goodwill relating to impairments or disposal of all or a portion of a business.

 

14



 

Notes to Condensed Consolidated Financial Statements

September 30, 2010

(Unaudited), continued

 

The gross amount of amortizable intangible assets, primarily product rights and technology was $17.2 billion as of September 30, 2010 and $10.8 billion as of December 31, 2009, and accumulated amortization was $6.1 billion as of September 30, 2010 and $5.1 billion as of December 31, 2009.  Indefinite-lived intangible assets, which relate to in-process research and development acquired in a business combination, was approximately $1.5 billion and $610 million at September 30, 2010 and December 31, 2009, respectively.  September 30, 2010 and December 31, 2009, respectively. In the third quarter of 2010, Abbott recorded an impairment charge of $189 million for an intangible asset related to sibutramine, a product which was withdrawn from the U.S. market in October 2010. This charge was based on a discounted cash flow analysis and is included as cost of products sold.  The estimated annual amortization expense for intangible assets is approximately $1.4 billion in 2010, $1.6 billion in 2011, $1.5 billion in 2012, $1.2 billion in 2013 and $1.1 billion in 2014.  Amortizable intangible assets are amortized over 2 to 30 years (average 12 years).

 

Note 13 — Restructuring Plans

 

In the third quarter of 2010, Abbott management approved a restructuring plan primarily related to the acquisition of Solvay’s pharmaceuticals business.  This plan streamlines operations, improves efficiencies and reduces costs in certain Solvay sites and functions as well as in certain Abbott and Solvay commercial organizations in various countries.  Action plans have been identified and most are expected to be implemented within the next two years. This plan will result in pretax charges of approximately $810 million to $970 million over the next two years.  These charges include employee-related costs of approximately $650 million, accelerated depreciation and asset write-downs of approximately $105 million, and other related exit costs of up to approximately $215 million, mainly related to discontinuation of certain research and development programs and product transfers. Under this plan, Abbott recorded charges to Cost of products sold, Research and Development and Selling, General and Administrative of approximately $81 million, $133 million and $222 million, respectively.  The following summarizes the activity for this restructuring:  (dollars in millions)

 

 

 

2010

 

2010 restructuring charge

 

$

436

 

Payments, asset impairments and other adjustments

 

(37

)

Accrued balance at September 30

 

$

399

 

 

In 2009 and prior years, Abbott management approved plans to realign its worldwide pharmaceutical and vascular manufacturing operations and selected domestic and international commercial and research and development operations in order to reduce costs.  Charges of $7 million and $26 million were recorded in the first nine months of 2010 and 2009, respectively, relating to these restructurings, primarily for accelerated depreciation and product transfer costs.  The following summarizes the activity for these restructurings: (dollars in millions)

 

 

 

2010

 

2009

 

Accrued balance at January 1

 

$

145

 

$

105

 

Restructuring charges

 

 

114

 

Payments and other adjustments

 

(96

)

(52

)

Accrued balance at September 30

 

$

 49

 

$

167

 

 

In 2008, Abbott management approved a plan to streamline global manufacturing operations, reduce overall costs, and improve efficiencies in Abbott’s core diagnostic business.  Charges of approximately $45 million and  $38 million were recorded in the first nine months of 2010 and 2009, respectively, relating to this restructuring, primarily for accelerated depreciation and product transfer costs.  Additional charges will occur through 2011 as a result of product re-registration timelines required under manufacturing regulations in a number of countries and product transition timelines.  The following summarizes the activity for this restructuring: (dollars in millions)

 

 

 

2010

 

2009

 

Accrued balance at January 1

 

$

98

 

$

110

 

Payments and other adjustments

 

(9

)

(9

)

Accrued balance at September 30

 

$

89

 

$

101

 

 

15



 

FINANCIAL REVIEW

 

Results of 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

 

 

 

Three Months Ended September 30

 

Nine Months Ended September 30

 

(dollars in millions)

 

2010

 

Percent
Change

 

2009

 

Percent
Change

 

2010

 

Percent
Change

 

2009

 

Percent
Change

 

Pharmaceutical Products

 

$

4,937

 

21.7

 

$

4,055

 

(1.6

)

$

13,955

 

19.9

 

$

11,637

 

(3.8

)

Nutritional Products

 

1,365

 

(1.5

)

1,386

 

9.8

 

4,099

 

6.4

 

3,851

 

6.8

 

Diagnostic Products

 

916

 

0.8

 

909

 

(0.3

)

2,779

 

6.8

 

2,603

 

(2.8

)

Vascular Products

 

790

 

18.6

 

666

 

4.7

 

2,372

 

20.5

 

1,968

 

24.8

 

Total Reportable Segments

 

8,008

 

14.1

 

7,016

 

1.2

 

23,205

 

15.7

 

20,059

 

0.5

 

Other

 

667

 

(10.6

)

745

 

31.4

 

1,994

 

4.1

 

1,916

 

18.6

 

Net Sales

 

$

8,675

 

11.8

 

$

7,761

 

3.5

 

$

25,199

 

14.7

 

$

21,975

 

1.8

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total U.S.

 

$

3,862

 

6.6

 

$

3,621

 

(1.7

)

$

10,906

 

7.1

 

$

10,186

 

0.5

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total International

 

$

4,813

 

16.2

 

$

4,140

 

8.5

 

$

14,293

 

21.2

 

$

11,789

 

3.0

 

 

Worldwide sales for the third quarter and the first nine months of 2010 compared to 2009 reflect the acquisition of Solvay Pharmaceuticals and the effect of exchange.  Excluding 1.0 percent of unfavorable exchange for the third quarter 2010, net sales increased 12.8 percent and excluding 1.8 percent of favorable exchange for the first nine months of 2010, net sales increased 12.9 percent.  The relatively stronger U.S. dollar decreased third quarter 2010 Total International sales by 2.0 percent, Pharmaceutical Products segment sales by 1.6 percent, Diagnostic Products segment sales by 1.4 percent and Vascular Products segment sales by 0.9 percent over the third quarter of 2009.  The relatively weaker U.S. dollar increased the first nine months 2010 Total International sales by 3.4 percent, Pharmaceutical Products segment sales by 1.8 percent, Nutritional Product segment sales by 2.0 percent, Diagnostic Products segment sales by 2.4 percent and Vascular Products segment sales by 1.5 percent over the first nine months of 2009.  The relatively stronger U.S. dollar decreased third quarter 2009 consolidated net sales by 4.9 percent, Total International sales by 9.6 percent, Pharmaceutical Products segment sales by 5.5 percent, Nutritional Product segment sales by 3.3 percent, Diagnostic Products segment sales by 6.1 percent and Vascular Products segment sales by 3.3 percent over the third quarter of 2008.  The relatively stronger U.S. dollar also decreased the first nine months 2009 consolidated net sales by 6.3 percent, Total International sales by 11.9 percent, Pharmaceutical Products segment sales by 6.8 percent, Nutritional Product segment sales by 4.2 percent, Diagnostic Products segment sales by 8.0 percent and Vascular Products segment sales by 5.3 percent over the first nine months of 2008. Nutritional Products segment sales in 2010 were affected by the voluntary recall of certain Similac-brand powder infant formulas, primarily in the U.S. in September 2010.  The sales growth in 2010 and 2009 for the Vascular Products segment was impacted by the launch in Japan of the Xience V drug eluting stent in the first quarter of 2010 and the U.S. launch of the Xience V drug eluting stent in the third quarter of 2008.  The sales growth in 2010 for the Pharmaceutical Product segment is primarily due to the acquisition of Solvay Pharmaceuticals.   The sales growth in 2009 for the Pharmaceutical Products segment was impacted by decreased sales of Depakote due to generic competition.  The increase in Other sales for the third quarter of 2009 is primarily due to the acquisition of Advanced Medical Optics, Inc. in February 2009.

 

16



 

FINANCIAL REVIEW

(continued)

 

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.

 

 

 

Nine Months Ended September 30

 

(dollars in millions)

 

2010

 

Percent
Change

 

2009

 

Percent
Change

 

Pharmaceutical Products —

 

 

 

 

 

 

 

 

 

U.S. Specialty

 

$

3,231

 

(1.9

)

$

3,295

 

(10.7

)

U.S. Primary Care

 

2,111

 

(1.4

)

2,141

 

(1.2

)

International Pharmaceuticals

 

5,992

 

7.2

 

5,589

 

1.2

 

 

 

 

 

 

 

 

 

 

 

Nutritional Products —

 

 

 

 

 

 

 

 

 

U.S. Pediatric Nutritionals

 

905

 

(4.5

)

947

 

1.3

 

International Pediatric Nutritionals

 

1,237

 

10.9

 

1,115

 

13.4

 

U.S. Adult Nutritionals

 

1,011

 

6.9

 

946

 

9.2

 

International Adult Nutritionals

 

914

 

14.4

 

800

 

 

 

 

 

 

 

 

 

 

 

 

Diagnostics —

 

 

 

 

 

 

 

 

 

Immunochemistry

 

2,140

 

4.8

 

2,042

 

(4.3

)

 

Decreased sales of Depakote, due to continued generic competition, Zemplar, Kaletra and Lupron decreased U.S. Specialty product sales in 2010 and were partially offset by increased sales of HUMIRA.  Decreased sales of Depakote due to generic competition impacted U.S. Specialty product sales in 2009 and was partially offset by increased sales of HUMIRA and the addition of Lupron sales from the conclusion of the TAP joint venture in April 2008.  U.S. sales of Depakote for the first nine months of 2010, 2009 and 2008 were $115 million, $257 million and $1.0 billion, respectively.  U.S. Primary Care sales were impacted by the discontinuation of Azmacort and generic competition for Cardizem LA in 2010 and by decreased Omnicef and Synthroid sales in 2009 due to generic competition.  These impacts were partially offset by increased sales of Niaspan and the TriCor/Trilipix franchise in both 2010 and 2009.  Increased sales of HUMIRA favorably impacted International Pharmaceutical sales in both 2010 and 2009.  International sales of HUMIRA for the first nine months of 2010 and 2009 were $2.674 billion and $2.081 billion, respectively.  Abbott forecasts full year worldwide HUMIRA sales growth to approach 20 percent in 2010.  The relatively weaker U.S. dollar increased International Pharmaceutical sales in 2010 by 3.4 percent and the relatively stronger U.S. dollar decreased International Pharmaceutical sales in 2009 by 13.4 percent.  U.S. Pediatric Nutritionals sales in 2010 were affected by the voluntary recall of certain Similac-brand powder infant formulas, primarily in the U.S. in September of 2010.  International Pediatric Nutritionals sales increases in 2010 and 2009 were due primarily to volume growth in developing countries.  The relatively weaker U.S. dollar increased International Adult Nutritional sales in 2010 by 4.4 percent and the relatively stronger U.S. dollar decreased International Adult Nutritional sales in 2009 by 10.6 percent.  The relatively weaker U.S. dollar increased Immunochemistry sales in 2010 by 2.7 percent and the relatively stronger U.S. dollar decreased Immunochemistry sales in 2009 by 8.6 percent.

 

The gross profit margin was 56.9 percent for the third quarter 2010, compared to 56.7 percent for the third quarter 2009.  First nine months 2010 gross profit margin was 57.9 percent, compared to 57.1 percent for the first nine months 2009.  Excluding charges for the impairment of an intangible asset and for restructuring, the gross profit margins for the third quarter and first nine months of 2010 were 60.0 percent and 58.9 percent, respectively.  The increases in the gross profit margins in 2010 were due, in part, to improved margins in the pharmaceutical, vascular, diabetes and diagnostics businesses and the favorable effect of exchange on the gross profit margin ratios.

 

Research and development expenses increased 59.7 percent in the third quarter 2010 and 33.6 percent for the first nine months 2010 over comparable 2009 periods.  Excluding charges related to the Solvay restructurings announced in the third quarter 2010, research and development expenses for the third quarter and first nine months increased 39.5 percent and 26.8 percent, respectively, over comparable 2009 periods.  These increases, exclusive of the effects of the restructuring charges, reflect the acquisitions of Solvay Pharmaceuticals in February 2010 and Facet Biotech in April 2010 and continued pipeline spending, including programs in vascular devices, biologics, neuroscience, oncology and Hepatitis C.  The majority of research and development expenditures is concentrated on pharmaceutical products.

 

17



 

FINANCIAL REVIEW

(continued)

 

Selling, general and administrative expenses for the third quarter and first nine months increased 28.2 percent and 22.6 percent, respectively, over the comparable 2009 periods.  Excluding charges related to the Solvay restructurings announced in the third quarter 2010, selling, general and administrative expenses for the third quarter and first nine months increased 17.5 percent and 19.0 percent, respectively, over comparable 2009 periods. These increases, exclusive of the effects of the restructuring charges, reflect the acquisitions of Solvay Pharmaceuticals in February 2010 and AMO in February 2009, and higher provisions for litigation in the second quarter of 2010.

 

Business Acquisitions

 

On September 8, 2010, Abbott acquired Piramal Healthcare Limited’s Healthcare Solutions business, a leader in the Indian branded generics market, for $2.2 billion, in cash, plus additional payments of $400 million annually in 2011, 2012, 2013 and 2014.  Abbott recorded a $1.5 billion liability for the present value of the additional payments at the acquisition date.  The accounts of Abbott’s foreign subsidiaries are consolidated as of August 31, but due to the significance of the amount, the acquisition was recorded in the September 30, 2010 Condensed Consolidated Balance Sheet.  The acquisition was financed with current cash.  The preliminary allocation of the fair value of the acquisition resulted in the recording of $1.0 billion of goodwill and $2.6 billion of acquired intangible assets.  Acquired intangible assets consist primarily of trade names and associated rights and customer relationships and will be amortized over 2 to 21 years (average of 20 years).  The allocation of the fair value of the acquisition will be finalized when the valuation is completed.

 

In February 2010, Abbott acquired Solvay’s pharmaceuticals business (Solvay Pharmaceuticals) for approximately $6.1 billion, in cash, plus additional payments of up to EUR 100 million per year if certain sales milestones are met in 2011, 2012 and 2013.  Contingent consideration of approximately $290 million was recorded based on a preliminary valuation.   The acquisition of Solvay Pharmaceuticals provides Abbott with a large and complementary portfolio of pharmaceutical products and expands Abbott’s presence in key global emerging markets.  Abbott acquired control of this business on February 15, 2010 and the financial results of the acquired operations are included in these financial statements beginning on that date. Net sales for the acquired operations for the third quarter and first nine months of 2010 were approximately $900 million and $2.0 billion, respectively.  Pretax loss of the acquired operations, including acquisition, integration and restructuring expenses, for the third quarter and first nine months of 2010 were approximately $365 million and $435 million, respectively.  The acquisition was funded with current cash and short-term investments.  The preliminary allocation of the fair value of the acquisition is shown in the table below (in billions of dollars).  The allocation of the fair value of the acquisition will be finalized when the valuation is completed.

 

Goodwill, non-deductible

 

$

2.0

 

Acquired intangible assets, non-deductible

 

4.2

 

Acquired in-process research and development, non-deductible

 

0.5

 

Acquired net tangible assets

 

0.8

 

Deferred income taxes recorded at acquisition

 

(1.1

)

Total preliminary allocation of fair value

 

$

6.4

 

 

Acquired intangible assets consist primarily of product rights for currently marketed products and are amortized over 2 to 14 years (average of 11 years).  Acquired in-process research and development is accounted for as indefinite lived intangible assets until regulatory approval or discontinuation.  The net tangible assets acquired consist primarily of trade accounts receivable of approximately $695 million, inventory of approximately $420 million, property and equipment of approximately $710 million, net of assumed liabilities, primarily trade accounts payable, accrued compensation and other liabilities.

 

18



 

FINANCIAL REVIEW

(continued)

 

The following unaudited pro forma financial information reflects the consolidated results of operations of Abbott as if the acquisition of Solvay Pharmaceuticals had taken place on January 1, 2010 and January 1, 2009.  The pro forma information includes adjustments for amortization of intangible assets and fair value adjustments to acquisition-date inventory as well as acquisition, integration and restructuring expenses.  The pro forma financial information is not necessarily indicative of the results of operations as they would have been had the transaction been effected on the assumed date. (in billions of dollars, except per share amounts)

 

 

 

Three Months Ended
September 30