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, 2012

 

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, 2012, Abbott Laboratories had 1,580,667,737 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

 

 

 

2012

 

2011

 

2012

 

2011

 

Net Sales

 

$

9,773,241

 

$

9,816,665

 

$

29,036,974

 

$

28,473,806

 

 

 

 

 

 

 

 

 

 

 

Cost of products sold

 

3,698,078

 

3,973,250

 

11,060,308

 

11,702,705

 

Research and development

 

1,164,187

 

1,009,627

 

3,180,751

 

2,977,807

 

Acquired in-process and collaborations research and development

 

 

 

260,000

 

272,500

 

Selling, general and administrative

 

2,921,923

 

4,238,910

 

8,866,723

 

9,851,314

 

Total Operating Cost and Expenses

 

7,784,188

 

9,221,787

 

23,367,782

 

24,804,326

 

 

 

 

 

 

 

 

 

 

 

Operating Earnings

 

1,989,053

 

594,878

 

5,669,192

 

3,669,480

 

 

 

 

 

 

 

 

 

 

 

Interest expense

 

152,034

 

124,339

 

406,091

 

404,055

 

Interest (income)

 

(18,255

)

(20,816

)

(56,153

)

(61,400

)

Net foreign exchange loss (gain)

 

(6,259

)

(5,018

)

4,349

 

(48,180

)

Other (income) expense, net

 

(10,851

)

(5,222

)

(73,822

)

130,068

 

Earnings Before Taxes

 

1,872,384

 

501,595

 

5,388,727

 

3,244,937

 

Taxes on Earnings

 

(70,422

)

198,414

 

479,188

 

135,156

 

Net Earnings

 

$

1,942,806

 

$

303,181

 

$

4,909,539

 

$

3,109,781

 

 

 

 

 

 

 

 

 

 

 

Basic Earnings Per Common Share

 

$

1.22

 

$

0.19

 

$

3.09

 

$

1.99

 

 

 

 

 

 

 

 

 

 

 

Diluted Earnings Per Common Share

 

$

1.21

 

$

0.19

 

$

3.06

 

$

1.98

 

 

 

 

 

 

 

 

 

 

 

Cash Dividends Declared Per Common Share

 

$

0.51

 

$

0.48

 

$

1.53

 

$

1.44

 

 

 

 

 

 

 

 

 

 

 

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

 

1,576,771

 

1,558,556

 

1,574,466

 

1,555,482

 

Dilutive Common Stock Options and Awards

 

17,508

 

9,731

 

16,500

 

8,617

 

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

 

1,594,279

 

1,568,287

 

1,590,966

 

1,564,099

 

 

 

 

 

 

 

 

 

 

 

Outstanding Common Stock Options Having No Dilutive Effect

 

1,720

 

61,201

 

1,166

 

60,653

 

 

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

 

2



 

Abbott Laboratories and Subsidiaries

 

Condensed Consolidated Statement of Comprehensive Income

 

(Unaudited)

 

(dollars thousands)

 

 

 

Three Months Ended

 

Nine Months Ended

 

 

 

September 30

 

September 30

 

 

 

2012

 

2011

 

2012

 

2011

 

Net Earnings

 

$

1,942,806

 

$

303,181

 

$

4,909,539

 

$

3,109,781

 

Foreign currency translation gain (loss) adjustments

 

820,569

 

(1,494,495

)

(174,668

)

478,793

 

Amortization of net actuarial losses and prior service cost and credits, net of taxes of $18,865 and $64,770 in 2012 and $14,964 and $44,623 in 2011

 

32,685

 

28,250

 

112,357

 

80,871

 

Unrealized (losses) gains on marketable equity securities, net of taxes of $(9,918) and $(4,013) in 2012 and $(4,484) and $1,612 in 2011

 

(17,353

)

(7,768

)

(6,952

)

2,793

 

Net adjustments for derivative instruments designated as cash flow hedges, net of taxes of $(12,072) and $(22,367) in 2012 and $8,988 and $(13,972) in 2011

 

(48,286

)

35,952

 

(89,467

)

(55,888

)

Other comprehensive income (loss), net of tax

 

787,615

 

(1,438,061

)

(158,730

)

506,569

 

Comprehensive Income (Loss)

 

$

2,730,421

 

$

(1,134,880

)

$

4,750,809

 

$

3,616,350

 

 

 

 

 

 

 

 

 

 

 

 

 

Sept. 30
2012

 

Dec. 31
2011

 

Supplemental Accumulated Other Comprehensive Income Information, net of tax:

 

 

 

 

 

Cumulative foreign currency translation loss adjustments

 

$

247,195

 

$

72,527

 

Net actuarial losses and prior service cost and credits

 

2,618,262

 

2,730,619

 

Cumulative unrealized (gains) on marketable equity securities

 

(31,477

)

(38,429

)

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

 

(78,065

)

(167,532

)

 

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

 

3



 

Abbott Laboratories and Subsidiaries

 

Condensed Consolidated Statement of Cash Flows

 

(Unaudited)

 

(dollars in thousands)

 

 

 

Nine Months Ended
September 30

 

 

 

2012

 

2011

 

Cash Flow From (Used in) Operating Activities:

 

 

 

 

 

Net earnings

 

$

4,909,539

 

$

3,109,781

 

Adjustments to reconcile earnings to net cash from operating activities -

 

 

 

 

 

Depreciation

 

1,105,441

 

1,154,198

 

Amortization of intangibles

 

1,088,989

 

1,241,267

 

Share-based compensation

 

358,735

 

320,103

 

Acquired in-process and collaborations research and development

 

260,000

 

272,500

 

Trade receivables

 

689,292

 

272,530

 

Inventories

 

(465,470

)

47,521

 

Other, net

 

(135,265

)

1,150,828

 

Net Cash From Operating Activities

 

7,811,261

 

7,568,728

 

 

 

 

 

 

 

Cash Flow From (Used in) Investing Activities:

 

 

 

 

 

Acquisitions of property and equipment

 

(1,409,193

)

(1,216,765

)

Acquisitions of businesses and technology

 

(1,202,473

)

(672,500

)

Purchases of investment securities, net

 

(2,246,183

)

(1,093,548

)

Release of restricted funds

 

 

1,870,000

 

Other

 

1,998

 

9,171

 

Net Cash (Used in) Investing Activities

 

(4,855,851

)

(1,103,642

)

 

 

 

 

 

 

Cash Flow From (Used in) Financing Activities:

 

 

 

 

 

Proceeds from issuance of (repayments of) short-term debt and other

 

788,358

 

(786,830

)

Payment of long-term debt

 

(54,000

)

(2,008,836

)

Purchases of common shares

 

(1,723,348

)

(74,428

)

Proceeds from stock options exercised, including income tax benefit

 

1,570,411

 

317,463

 

Dividends paid

 

(2,370,937

)

(2,186,006

)

Net Cash (Used in) Financing Activities

 

(1,789,516

)

(4,738,637

)

 

 

 

 

 

 

Effect of exchange rate changes on cash and cash equivalents

 

18,234

 

(325,521

)

 

 

 

 

 

 

Net Increase in Cash and Cash Equivalents

 

1,184,128

 

1,400,928

 

Cash and Cash Equivalents, Beginning of Year

 

6,812,820

 

3,648,371

 

Cash and Cash Equivalents, End of Period

 

$

7,996,948

 

$

5,049,299

 

 

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

 

4



 

Abbott Laboratories and Subsidiaries

 

Condensed Consolidated Balance Sheet

 

(Unaudited)

 

(dollars in thousands)

 

 

 

September 30
2012

 

December 31
2011

 

Assets

 

 

 

 

 

Current Assets:

 

 

 

 

 

Cash and cash equivalents

 

$

7,996,948

 

$

6,812,820

 

Investments, primarily time deposits and certificates of deposit

 

3,507,574

 

1,284,539

 

Trade receivables, less allowances of $417,371 in 2012 and $420,579 in 2011

 

6,948,714

 

7,683,920

 

Inventories:

 

 

 

 

 

Finished products

 

2,500,368

 

2,220,527

 

Work in process

 

530,464

 

432,358

 

Materials

 

783,424

 

631,364

 

Total inventories

 

3,814,256

 

3,284,249

 

Prepaid expenses, deferred income taxes, and other receivables

 

4,996,752

 

4,703,246

 

Total Current Assets

 

27,264,244

 

23,768,774

 

Investments

 

380,383

 

378,225

 

Property and Equipment, at Cost

 

18,629,832

 

18,016,565

 

Less: accumulated depreciation and amortization

 

10,669,184

 

10,142,610

 

Net Property and Equipment

 

7,960,648

 

7,873,955

 

Intangible Assets, net of amortization

 

8,959,751

 

9,989,636

 

Goodwill

 

15,708,924

 

15,705,380

 

Deferred Income Taxes and Other Assets

 

2,983,788

 

2,560,923

 

 

 

$

63,257,738

 

$

60,276,893

 

Liabilities and Shareholders’ Investment

 

 

 

 

 

Current Liabilities:

 

 

 

 

 

Short-term borrowings

 

$

3,206,147

 

$

2,347,859

 

Trade accounts payable

 

1,605,202

 

1,721,127

 

Salaries, wages and commissions

 

1,395,860

 

1,260,121

 

Other accrued liabilities

 

7,542,305

 

7,854,994

 

Dividends payable

 

808,256

 

754,284

 

Income taxes payable

 

709,364

 

514,947

 

Current portion of long-term debt

 

1,018,844

 

1,026,896

 

Total Current Liabilities

 

16,285,978

 

15,480,228

 

Long-term Debt

 

12,054,640

 

12,039,822

 

Post-employment Obligations, Deferred Income Taxes and Other Long-term Liabilities

 

7,812,779

 

8,230,698

 

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: 2012: 1,670,540,288; 2011: 1,638,870,201

 

11,418,613

 

9,817,134

 

Common shares held in treasury, at cost - Shares: 2012: 89,872,551; 2011: 68,491,382

 

(4,975,279

)

(3,687,478

)

Earnings employed in the business

 

23,326,756

 

20,907,362

 

Accumulated other comprehensive income (loss)

 

(2,755,915

)

(2,597,185

)

Total Abbott Shareholders’ Investment

 

27,014,175

 

24,439,833

 

Noncontrolling Interests in Subsidiaries

 

90,166

 

86,312

 

Total Shareholders’ Investment

 

27,104,341

 

24,526,145

 

 

 

$

63,257,738

 

$

60,276,893

 

 

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

 

5



 

Abbott Laboratories and Subsidiaries

 

Notes to Condensed Consolidated Financial Statements

 

September 30, 2012

 

(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, 2011.  The consolidated financial statements include the accounts of the parent company and subsidiaries, after elimination of intercompany transactions.

 

Effective January 1, 2011, the one month lag in the consolidation of the accounts of foreign subsidiaries was eliminated and the year-end of foreign subsidiaries was changed to December 31.  In accordance with applicable accounting literature, a change in subsidiaries’ year-end is treated as a change in accounting principle and requires retrospective application.  The impact of the change was not material to the results of operations for the previously reported annual and interim periods after January 1, 2009, and thus, those results have not been revised.  A charge of $137 million was recorded to Other (income) expense, net in the first three months of 2011 to recognize the cumulative immaterial impacts to 2009 and 2010.

 

Note 2 — Supplemental Financial Information

 

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.  Net earnings allocated to common shares for the three months and nine months ended September 30, 2012 were $1.928 billion and $4.871 billion, respectively, and net earnings allocated to common shares for the three months and nine months ended September 30, 2011 were $302 million and $3.102 billion, respectively.

 

Other (income) expense, net, for the nine months ended September 30, 2012 includes income of approximately $60 million from the resolution of a contractual agreement.  Other, net in Net cash from operating activities for 2012 includes payments of approximately $800 million to settle certain government investigations and the recognition of $386 million of tax benefits in the third quarter as a result of the favorable resolution of various tax positions pertaining to a prior year.  These items were partially offset by increases in other accrued liabilities, primarily related to restructuring activities and the timing of various payments.  Other, net in Net cash from operating activities for 2011 includes the non-cash impact of a litigation accrual of $1.5 billion which was partially offset by $570 million of tax benefits related to the favorable resolution of various tax positions pertaining to prior years.  Other, net in Net cash from operating activities for 2012 and 2011 includes the effects of contributions to defined benefit plans of $360 million and $390 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. required Abbott to secure the judgment in the event that its appeal to the Federal Circuit court was unsuccessful in overturning the district court’s decision.  In the first quarter of 2010, Abbott deposited $1.87 billion with an escrow agent and considered these assets to be restricted. On February 23, 2011, the Federal Circuit reversed the district court’s final judgment and found Centocor’s patent invalid.  In June 2011, the Federal Circuit denied Centocor’s petition to rehear or reconsider the decision and the restrictions on the funds were lifted.

 

The components of long-term investments as of September 30, 2012 and December 31, 2011 are as follows:

 

 

 

September 30

 

December 31

 

(dollars in millions)

 

2012

 

2011

 

Equity securities

 

$

319

 

$

317

 

Other

 

61

 

61

 

Total

 

$

380

 

$

378

 

 

6



 

Notes to Condensed Consolidated Financial Statements

September 30, 2012

(Unaudited), continued

 

Note 3 — Taxes on Earnings

 

Taxes on earnings reflect the estimated annual effective rates and include charges for interest and penalties.  Taxes on earnings in 2012 reflect the recognition of $386 million of tax benefits in the third quarter as a result of the favorable resolution of various tax positions pertaining to a prior year, which also decreased the gross amount of unrecognized tax benefits by approximately $540 million.  Taxes on earnings in 2011 reflect the effect of the tax rate applied to a litigation reserve in the third quarter and the recognition of $570 million of tax benefits as a result of the favorable resolution of various tax positions pertaining to prior years, which also decreased the gross amount of unrecognized tax benefits by approximately $1.2 billion.  Exclusive of these discrete items, 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.

 

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 $4 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.  On February 21, 2012, the United States Supreme Court denied Centocor Inc.’s and New York University’s petition to review a February 2011 Federal Circuit Court of Appeals decision reversing a $1.67 billion judgment in favor of Centocor and New York University on a patent they claimed Abbott’s HUMIRA infringed. This decision concludes the case.

 

The United States Department of Justice, through the United States Attorney for the Western District of Virginia, and various state Attorneys General investigated Abbott’s sales and marketing activities for Depakote.  The government sought to determine whether any of these activities violated civil and/or criminal laws, including the Federal False Claims Act, the Food, Drug and Cosmetic Act, and the Anti-Kickback Statute in connection with Medicare and/or Medicaid reimbursement to third parties.  The state Attorneys General offices sought to determine whether any of these activities violated various state laws, including state consumer fraud/protection statutes.  Abbott recorded charges of $1.5 billion in the third quarter of 2011 and $100 million in the first quarter of 2012 related to civil and criminal claims arising from this matter.  In May 2012, Abbott reached resolution of all Depakote-related federal claims, Medicaid-related claims with 49 states and the District of Columbia, and consumer protection claims with 45 states and the District of Columbia.  In the second quarter of 2012, Abbott paid approximately $800 million of the settlement and the remainder was paid in October 2012.  The payments are material to Abbott’s cash flows in 2012.

 

Excluding the settlement of Depakote-related claims, Abbott estimates the range of possible loss for its other legal proceedings and environmental exposures to be from approximately $90 million to $115 million.  The recorded accrual balance at September 30, 2012 for these other proceedings and exposures was approximately $95 million.  This accrual represents management’s 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 Abbott’s financial position, cash flows, or results of operations.

 

7



 

Notes to Condensed Consolidated Financial Statements

September 30, 2012

(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)

 

2012

 

2011

 

2012

 

2011

 

2012

 

2011

 

2012

 

2011

 

Service cost — benefits earned during the period

 

$

92

 

$

95

 

$

285

 

$

251

 

$

16

 

$

14

 

$

45

 

$

41

 

Interest cost on projected benefit obligations

 

114

 

131

 

340

 

350

 

20

 

22

 

61

 

66

 

Expected return on plans’ assets

 

(153

)

(171

)

(460

)

(471

)

(8

)

(9

)

(25

)

(25

)

Settlement

 

 

36

 

 

36

 

 

 

 

 

Net amortization

 

55

 

43

 

180

 

125

 

(3

)

(1

)

(6

)

(3

)

Net Cost

 

$

108

 

$

134

 

$

345

 

$

291

 

$

25

 

$

26

 

$

75

 

$

79

 

 

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 2012 and 2011, $360 million and $390 million, respectively, was contributed to defined benefit plans and $40 million was contributed to the post-employment medical and dental benefit plans in each period.

 

Note 6 — 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.  Effective January 1, 2012, certain international operations were transferred from the Established Pharmaceutical Products segment to the Proprietary Pharmaceutical Products segment.  The segment information below has been adjusted to reflect this reorganization.  Abbott’s reportable segments are as follows:

 

Proprietary Pharmaceutical Products — Worldwide sales of a broad line of proprietary pharmaceutical products.

 

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.

 

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.  In addition, no intangible assets or related amortization are allocated to the Established Pharmaceutical Products segment.  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.

 

8



 

Notes to Condensed Consolidated Financial Statements

September 30, 2012

(Unaudited), continued

 

 

 

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)

 

2012

 

2011

 

2012

 

2011

 

2012

 

2011

 

2012

 

2011

 

Proprietary Pharmaceutical Products

 

$

4,418

 

$

4,315

 

$

12,870

 

$

12,290

 

$

2,106

 

$

1,893

 

$

5,594

 

$

4,959

 

Established Pharmaceutical Products

 

1,272

 

1,372

 

3,775

 

3,975

 

350

 

297

 

913

 

893

 

Nutritional Products

 

1,605

 

1,537

 

4,755

 

4,450

 

244

 

205

 

720

 

540

 

Diagnostic Products

 

1,042

 

1,025

 

3,162

 

3,046

 

201

 

199

 

623

 

555

 

Vascular Products

 

743

 

828

 

2,312

 

2,507

 

219

 

257

 

672

 

700

 

Total Reportable Segments

 

9,080

 

9,077

 

26,874

 

26,268

 

3,120

 

2,851

 

8,522

 

7,647

 

Other

 

693

 

740

 

2,163

 

2,206

 

 

 

 

 

 

 

 

 

Net Sales

 

$

9,773

 

$

9,817

 

$

29,037

 

$

28,474

 

 

 

 

 

 

 

 

 

Corporate functions and benefit plans costs

 

 

 

 

 

 

 

 

 

(148

)

(108

)

(456

)

(344

)

Non-reportable segments

 

 

 

 

 

 

 

 

 

56

 

39

 

287

 

173

 

Net interest expense

 

 

 

 

 

 

 

 

 

(134

)

(104

)

(350

)

(343

)

Acquired in-process and collaborations research and development

 

 

 

 

 

 

 

 

 

 

 

(260

)

(273

)

Share-based compensation (a)

 

 

 

 

 

 

 

 

 

(76

)

(68

)

(359

)

(320

)

Other, net (b)

 

 

 

 

 

 

 

 

 

(946

)

(2,108

)

(1,995

)

(3,295

)

Consolidated Earnings Before Taxes

 

 

 

 

 

 

 

 

 

$

1,872

 

$

502

 

$

5,389

 

$

3,245

 

 


(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 2011 includes a charge of $1.5 billion related to a government investigation.

 

Note 7 — Incentive Stock Programs

 

In the first nine months of 2012, Abbott granted 1,931,213 stock options, 1,965,362 replacement stock options, 1,000,925 restricted stock awards and 6,790,557 restricted stock units under these programs.  At September 30, 2012, approximately 155 million shares were reserved for future grants.  Information regarding the number of options outstanding and exercisable at September 30, 2012 is as follows:

 

 

 

Outstanding

 

Exercisable

 

Number of shares

 

53,760,658

 

48,509,411

 

Weighted average remaining life (years)

 

4.1

 

3.8

 

Weighted average exercise price

 

$

51.70

 

$

51.13

 

Aggregate intrinsic value (in millions)

 

$

928

 

$

867

 

 

The total unrecognized share-based compensation cost at September 30, 2012 amounted to approximately $330 million which is expected to be recognized over the next three years.

 

9



 

Notes to Condensed Consolidated Financial Statements

September 30, 2012

(Unaudited), continued

 

Note 8 — Business Combinations and Technology Acquisitions

 

In the second quarter of 2012, Abbott recorded a charge to acquired in-process and collaborations research and development of $110 million as a result of the acquisition of AP214, a drug under development for the prevention of acute kidney injury associated with major cardiac surgery in patients at increased risk.  In the first quarter of 2012, Abbott recorded a charge to acquired in-process and collaborations research and development of $150 million as a result of entering into a global collaboration to develop and commercialize an oral, next-generation JAK1 inhibitor in Phase II development with the potential to treat multiple autoimmune diseases.  Additional payments of approximately $1.2 billion could be required for the achievement of certain development, regulatory and commercial milestones under this agreement.  In the fourth quarter of 2011, Abbott entered into a collaboration, with Reata on a worldwide basis, for the joint development and commercialization of second-generation oral antioxidant inflammation modulators resulting in a charge to acquired in-process and collaborations research and development of $400 million which was paid in the first quarter of 2012.  In connection with the acquisition of Solvay Pharmaceuticals, the achievement of a certain sales milestone resulted in a payment of approximately $134 million in the first quarter of 2012 for which a liability was previously established.

 

In 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.  In the first and second quarters of 2011, certain milestones were achieved and charges to acquired in-process and collaborations research and development of $100 million and $88 million were recorded.  In the first quarter of 2012, $50 million of research and development expense was recorded related to the achievement of a clinical development milestone under this agreement.   In addition, in the second quarter of 2011, Abbott entered into an agreement to develop and commercialize a treatment of rheumatoid arthritis and psoriasis resulting in a charge to acquired in-process and collaborations research and development of $85 million.

 

Note 9 — 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 $414 million and $1.6 billion at September 30, 2012 and December 31, 2011, respectively, 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, 2012 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 2012 and 2011.

 

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, 2012 and December 31, 2011, Abbott held $18.8 billion and $15.7 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 $685 million and approximately $680 million as of September 30, 2012 and December 31, 2011, 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.

 

Abbott is a party to interest rate swap contracts totaling $6.8 billion at September 30, 2012 and at December 31, 2011 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 2012 or 2011 for these hedges.

 

10



 

Notes to Condensed Consolidated Financial Statements

September 30, 2012

(Unaudited), continued

 

The following table summarizes the amounts and location of certain derivative financial instruments as of September 30, 2012 and December 31, 2011:

 

 

 

Fair Value - Assets

 

Fair Value - Liabilities

 

(dollars in millions)

 

Sept. 30
2012

 

Dec. 31
2011

 

Balance Sheet Caption

 

Sept. 30
2012

 

Dec. 31
2011

 

Balance Sheet Caption

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest rate swaps designated as fair value hedges

 

$

759

 

$

598

 

Deferred income taxes and other assets

 

$

 

$

 

n/a

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Foreign currency forward exchange contracts —

 

 

 

 

 

 

 

 

 

 

 

 

 

Hedging instruments

 

7

 

115

 

Prepaid expenses,

 

2

 

2

 

Other accrued liabilities

 

Others not designated as hedges

 

124

 

165

 

deferred income taxes, and other receivables

 

180

 

179

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

 

 

 

n/a

 

685

 

680

 

Short-term borrowings

 

 

 

$

890

 

$

878

 

 

 

$

867

 

$

861

 

 

 

 

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 2012 and 2011 and for certain other derivative financial instruments.  The amount of hedge ineffectiveness was not significant in 2012 and 2011 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)

 

2012

 

2011

 

2012

 

2011

 

2012

 

2011

 

2012

 

2011

 

Caption

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Foreign currency forward exchange contracts designated as cash flow hedges

 

$

(8

)

$

(22

)

$

(12

)

$

(98

)

$

43

 

$

(29

)

$

91

 

$

14

 

Cost of products sold

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

 

(15

)

(30

)

(5

)

(40

)

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

 

78

 

415

 

161

 

506

 

Interest expense

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Foreign currency forward exchange contracts not designated as hedges

 

n/a

 

n/a

 

n/a

 

n/a

 

11

 

60

 

128

 

(30

)

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.

 

11



 

Notes to Condensed Consolidated Financial Statements

September 30, 2012

(Unaudited), continued

 

The carrying values and fair values of certain financial instruments as of September 30, 2012 and December 31, 2011 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 2012

 

December 31 2011

 

(dollars in millions)

 

Carrying
Value

 

Fair
Value

 

Carrying
Value

 

Fair
Value

 

Long-term Investment Securities:

 

 

 

 

 

 

 

 

 

Equity securities

 

$

319

 

$

319

 

$

317

 

$

317

 

Other

 

61

 

50

 

61

 

42

 

Total Long-term Debt

 

(13,073

)

(15,555

)

(13,067

)

(15,129

)

Foreign Currency Forward Exchange Contracts:

 

 

 

 

 

 

 

 

 

Receivable position

 

131

 

131

 

280

 

280

 

(Payable) position

 

(182

)

(182

)

(181

)

(181

)

Interest Rate Hedge Contracts

 

759

 

759

 

598

 

598

 

 

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, 2012:

 

 

 

 

 

 

 

 

 

Equity securities

 

$

77

 

$

77

 

$

 

$

 

Interest rate swap derivative financial instruments

 

759

 

 

759

 

 

Foreign currency forward exchange contracts

 

131

 

 

131

 

 

Total Assets

 

$

967

 

$

77

 

$

890

 

$

 

 

 

 

 

 

 

 

 

 

 

Fair value of hedged long-term debt

 

$

7,495

 

$

 

$

7,495

 

$

 

Foreign currency forward exchange contracts

 

182

 

 

182

 

 

Contingent consideration related to business combinations

 

313

 

 

 

313

 

Total Liabilities

 

$

7,990

 

$

 

$

7,677

 

$

313

 

 

 

 

 

 

 

 

 

 

 

December 31, 2011:

 

 

 

 

 

 

 

 

 

Equity securities

 

$

93

 

$

93

 

$

 

$

 

Interest rate swap derivative financial instruments

 

598

 

 

598

 

 

Foreign currency forward exchange contracts

 

280

 

 

280

 

 

Total Assets

 

$

971

 

$

93

 

$

878

 

$

 

 

 

 

 

 

 

 

 

 

 

Fair value of hedged long-term debt

 

$

7,427

 

$

 

$

7,427

 

$

 

Foreign currency forward exchange contracts

 

181

 

 

181

 

 

Contingent consideration related to business combinations

 

423

 

 

 

423

 

Total Liabilities

 

$

8,031

 

$

 

$

7,608

 

$

423

 

 

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 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.

 

12



 

Notes to Condensed Consolidated Financial Statements

September 30, 2012

(Unaudited), continued

 

Note 10 — Goodwill and Intangible Assets

 

Foreign currency translation adjustments increased goodwill in the first nine months of 2011 by approximately $300 million, while there were no significant changes in 2012.  The amount of goodwill related to reportable segments at September 30, 2012 was $6.2 billion for the Proprietary Pharmaceutical Products segment, $3.0 billion for the Established Pharmaceutical Products segment, $209 million for the Nutritional Products segment, $385 million for the Diagnostic Products segment, and $2.6 billion for the Vascular Products segment.  There were no reductions of goodwill relating to impairments or disposal of all or a portion of a business.

 

The gross amount of amortizable intangible assets, primarily product rights and technology was $17.6 billion as of September 30, 2012 and $17.5 billion as of December 31, 2011, and accumulated amortization was $9.4 billion as of September 30, 2012 and $8.3 billion as of December 31, 2011. Indefinite-lived intangible assets, which relate to in-process research and development acquired in a business combination, was approximately $764 million at September 30, 2012 and $814 million at December 31, 2011. The estimated annual amortization expense for intangible assets is approximately $1.5 billion in 2012, $1.3 billion in 2013, $1.0 billion in 2014, $861 million in 2015 and $745 million in 2016.  Intangible asset amortization is included in Cost of products sold in the condensed consolidated statement of earnings.  Amortizable intangible assets are amortized over 2 to 30 years (average 11 years).

 

Note 11 — Restructuring Plans

 

In the third quarter 2012, Abbott management approved plans to streamline various commercial operations in order to reduce costs and improve efficiencies in Abbott’s core diagnostics, established pharmaceutical and nutritionals businesses.  Abbott recorded employee related severance charges of approximately $167 million in the third quarter 2012.  Additional charges of approximately $22 million were also recorded in the third quarter 2012, primarily for asset impairments.  Approximately $70 million is recorded in Cost of products sold and approximately $119 million as Selling, general and administrative expense. As of September 30, 2012, no significant cash payments have been made relating to these actions.

 

In 2011 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.  In the first three months of 2011, Abbott recorded $49 million to Cost of products sold, $18 million to Research and development and $49 million to Selling, general and administrative.  The following summarizes the activity for these restructurings: (dollars in millions)

 

 

 

2012

 

2011

 

Accrued balance at January 1

 

$

177

 

$

77

 

Restructuring charges

 

 

116

 

Payments and other adjustments

 

(19

)

(71

)

Accrued balance at September 30

 

$

158

 

$

122

 

 

Additional charges of $83 million and $12 million were recorded in the first nine months of 2012 and 2011, respectively, relating to these restructurings, primarily for accelerated depreciation.

 

In 2012 and 2010, Abbott management approved restructuring plans primarily related to the acquisition of Solvay Pharmaceuticals.  These plans streamline operations, improve efficiencies and reduce costs in certain Solvay sites and functions as well as in certain Abbott and Solvay commercial organizations in various countries.  In the third quarter 2012, Abbott recorded a charge of approximately $150 million for employee severance and contractual obligations, primarily related to the exit from a research and development facility.  Approximately $142 million is recorded as Research and development and $8 million as Selling, general and administrative.  The following summarizes the activity for these restructurings: (dollars in millions)

 

 

 

2012

 

2011

 

Accrued balance at January 1

 

$

108

 

$

410

 

Restructuring charges

 

150

 

 

Payments and other adjustments

 

(108

)

(179

)

Accrued balance at September 30

 

$

150

 

$

231

 

 

13



 

Notes to Condensed Consolidated Financial Statements

September 30, 2012

(Unaudited), continued

 

Additional charges of approximately $29 million and $95 million were recorded in the first nine months of 2012 and 2011, respectively, relating to this restructuring, primarily for accelerated depreciation, asset impairment and employee severance.

 

In 2011 and 2008, Abbott management approved a plan to streamline global manufacturing operations, reduce overall costs, and improve efficiencies in Abbott’s core diagnostic business.  A charge of $31 million was recorded in Cost of products sold for the 2011 restructuring. The following summarizes the activity for this restructuring: (dollars in millions)

 

 

 

2012

 

2011

 

Accrued balance at January 1

 

$

79

 

$

88

 

Restructuring charges

 

 

31

 

Payments and other adjustments

 

(22

)

(27

)

Accrued balance at September 30

 

$

57

 

$

92

 

 

Additional charges of approximately $12 million and $28 million were recorded in the first nine months of 2012 and 2011, respectively, relating to this restructuring, primarily for accelerated depreciation and product transfer costs.  Additional charges will occur through 2012 as a result of product re-registration timelines required under manufacturing regulations in a number of countries and product transition timelines.

 

Note 12 — Separation of Abbott’s Proprietary Pharmaceuticals Business

 

In October 2011, Abbott announced a plan to separate into two publicly traded companies, one in diversified medical products and the other in research-based pharmaceuticals.  To accomplish the separation, Abbott plans to create a new company for its research-based pharmaceuticals business which will include Abbott’s Proprietary Pharmaceutical Products segment.  The transaction is expected to take the form of a tax-free distribution to Abbott shareholders of the stock of the newly created research-based pharmaceutical company.  Abbott expects to be ready to separate the company on January 1, 2013 subject to obtaining the required approvals.  Subsequent to the separation, the historical results of the research-based pharmaceuticals business will be presented as discontinued operations.  Annual net sales for the new research-based pharmaceuticals business were approximately $17.4 billion in 2011.

 

Note 13 — Subsequent Event

 

On October 17, 2012, Reata Pharmaceuticals informed Abbott that it is discontinuing the Phase III clinical study, known as BEACON, designed to evaluate bardoxolone methyl in diabetic patients with advanced chronic kidney disease.  The discontinuation is based on a recommendation from the study’s Independent Data Monitoring Committee regarding safety concerns due to “excess serious adverse events and mortality in the bardoxolone methyl arm.”  Reata and Abbott will closely examine the data from this study to determine whether there is an appropriate path forward for the development of bardoxolone methyl in chronic kidney disease or other indications.  Abbott has the rights to bardoxolone methyl outside the U.S., excluding certain Asian markets.  At September 30, 2012, Abbott holds a $124 million equity investment in Reata and is evaluating the impact of this event on the carrying value of the investment.

 

14



 

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)

 

2012

 

Percent
Change

 

2011

 

Percent
Change

 

2012

 

Percent
Change

 

2011

 

Percent
Change

 

Proprietary Pharmaceutical Products

 

$

4,418

 

2.4

 

$

4,315

 

13.4

 

$

12,870

 

4.7

 

$

12,290

 

12.8

 

Established Pharmaceutical Products

 

1,272

 

(7.3

)

1,372

 

23.0

 

3,775

 

(5.0

)

3,975

 

31.8

 

Nutritional Products

 

1,605

 

4.5

 

1,537

 

12.6

 

4,755

 

6.9

 

4,450

 

8.6

 

Diagnostic Products

 

1,042

 

1.6

 

1,025

 

11.9

 

3,162

 

3.8

 

3,046

 

9.6

 

Vascular Products

 

743

 

(10.2

)

828

 

4.7

 

2,312

 

(7.8

)

2,507

 

5.7

 

Total Reportable Segments

 

9,080

 

 

9,077

 

13.6

 

26,874

 

2.3

 

26,268

 

13.4

 

Other

 

693

 

(6.4

)

740

 

8.3

 

2,163

 

(1.9

)

2,206

 

8.4

 

Net Sales

 

$

9,773

 

(0.4

)

$

9,817

 

13.2

 

$

29,037

 

2.0

 

$

28,474

 

13.0

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total U.S.

 

$

4,214

 

3.1

 

$

4,088

 

5.8

 

$

12,115

 

5.0

 

$

11,543

 

5.8

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total International

 

$

5,559

 

(3.0

)

$

5,729

 

19.1

 

$

16,922

 

(0.1

)

$

16,931

 

18.5

 

 

The net sales growth for the third quarter and first nine months of 2012 reflects unit growth, partially offset by unfavorable exchange.  Excluding 4.5 percent and 3.6 percent of unfavorable exchange for the third quarter and first nine months of 2012, net sales increased 4.1 percent and 5.6 percent, respectively.  The relatively stronger U.S. dollar decreased third quarter 2012 Total International sales by 7.7 percent, decreased Proprietary Pharmaceutical Products segment sales by 4.0 percent, decreased Established Pharmaceutical Products segment sales by 9.6 percent, decreased Nutritional Product segment sales by 1.8 percent, decreased Diagnostic Products segment sales by 5.0 percent and decreased Vascular Products segment sales by 3.9 percent over the third quarter of 2011.  The relatively stronger U.S. dollar decreased the first nine months 2012 Total International sales by 6.0 percent, decreased Proprietary Pharmaceutical Products segment sales by 3.3 percent, decreased Established Pharmaceutical Products segment sales by 7.7 percent, decreased Nutritional Product segment sales by 1.4 percent, decreased Diagnostic Products segment sales by 3.8 percent and decreased Vascular Products segment sales by 2.6 percent over the first nine months of 2011.  In addition to unfavorable exchange, the decrease in 2012 Vascular Products sales is due to the winding down of royalty and supply agreements related to certain third-party products, including Promus.  Excluding this royalty and supply agreement revenue in both periods and the unfavorable effect of exchange, Vascular Products sales increased 3.9 percent and 4.3 percent in the third quarter and first nine months of 2012, respectively.

 

The net sales growth for the third quarter and first nine months of 2011 reflects unit growth, the acquisition of Piramal Healthcare Limited’s Healthcare Solution business in September 2010 and the effect of exchange.  The net sales growth for the first nine months of 2011 also reflects the acquisition of Solvay’s pharmaceuticals business in February 2010.  Excluding 5.3 percent and 3.8 percent of favorable exchange for the third quarter and first nine months of 2011, net sales increased 7.9 percent and 9.2 percent, respectively.  The relatively weaker U.S. dollar increased third quarter 2011 Total International sales by 9.5 percent, increased Proprietary Pharmaceutical Products segment sales by 4.6 percent, increased Established Pharmaceutical Products segment sales by 9.5 percent, increased Nutritional Product segment sales by 3.1 percent, increased Diagnostic Products segment sales by 6.5 percent and increased Vascular Products segment sales by 5.3 percent over the third quarter of 2010.  The relatively weaker U.S. dollar increased the first nine months 2011 Total International sales by 6.7 percent, increased Proprietary Pharmaceutical Products segment sales by 3.2 percent, increased Established Pharmaceutical Products segment sales by 7.1 percent, increased Nutritional Product segment sales by 2.7 percent, increased Diagnostic Products segment sales by 4.6 percent and increased Vascular Products segment sales by 3.8 percent over the first nine months of 2010.  Sales growth in the Proprietary Pharmaceutical Products segment was impacted by the acquisition of Solvay Pharmaceuticals in February 2010.  Sales growth in the Established Pharmaceutical Products segment and in Total International sales was impacted by the acquisition of Solvay Pharmaceuticals in February 2010 and Piramal Healthcare Limited’s Healthcare solutions business in September 2010.

 

15



 

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.

 

(dollars in millions)

 

2012

 

Percent
Change

 

2011

 

Percent
Change

 

Proprietary Pharmaceuticals —

 

 

 

 

 

 

 

 

 

Total U.S. Proprietary sales

 

$

7,138

 

7

 

$

6,648

 

9

 

HUMIRA

 

2,964

 

26

 

2,349

 

18

 

TRILIPIX/TriCor

 

897

 

(7

)

963

 

3

 

Niaspan

 

634

 

(12

)

718

 

12

 

AndroGel

 

787

 

28

 

615

 

42

 

Lupron

 

414

 

3

 

401

 

14

 

Synthroid

 

383

 

(1

)

387

 

21

 

Kaletra

 

196

 

(13

)

226

 

(11

)

 

 

 

 

 

 

 

 

 

 

Total International Proprietary sales

 

5,732

 

2

 

5,642

 

17

 

HUMIRA

 

3,621

 

6

 

3,405

 

27

 

Synagis

 

506

 

9

 

463

 

(2

)

Kaletra

 

567

 

(14

)

656

 

(1

)

Lupron

 

175

 

(13

)

201

 

3

 

 

 

 

 

 

 

 

 

 

 

Total Established Pharmaceutical Products sales —

 

3,775

 

(5

)

3,975

 

32

 

Clarithromycin

 

355

 

(6

)

378

 

3

 

TriCor and Lipanthyl (fenofibrate)

 

224

 

(5

)

237

 

n/m

 

Creon

 

223

 

1

 

222

 

n/m

 

Serc

 

153

 

(16

)

182

 

n/m

 

Duphaston

 

196

 

16

 

170

 

n/m

 

Synthroid

 

78

 

1

 

77

 

13

 

 

 

 

 

 

 

 

 

 

 

Nutritionals —

 

 

 

 

 

 

 

 

 

U.S. Pediatric Nutritionals

 

1,079

 

16

 

931

 

3

 

International Pediatric Nutritionals

 

1,499

 

5

 

1,420

 

15

 

U.S. Adult Nutritionals

 

1,075

 

4

 

1,030

 

2

 

International Adult Nutritionals

 

1,093

 

4

 

1,055

 

15

 

 

 

 

 

 

 

 

 

 

 

Diagnostics —

 

 

 

 

 

 

 

 

 

Immunochemistry

 

2,429

 

4

 

2,331

 

9

 

 

 

 

 

 

 

 

 

 

 

Vascular Products (1) —

 

 

 

 

 

 

 

 

 

Xience

 

1,199

 

3

 

1,160

 

16

 

Other Coronary Products

 

448

 

(1

)

454

 

10

 

Endovascular

 

338

 

 

339

 

11

 

 

 

 

 

 

 

 

 

 

 

n/m — Percent change is not meaningful

 

 

 

 

 

 

 

 

 

 


(1) Other Coronary Products include primarily guidewires and balloon catheters.  Endovascular includes vessel closure, carotid stents and other peripheral products.

 

Excluding the negative effect of exchange, Total International Proprietary sales increased 8.7 percent in 2012.  In Proprietary Phamaceuticals, a generic version of TriCor is expected to enter the U.S. market in the fourth quarter of 2012.  As a result, sales for Abbott’s combined lipid franchise including TriCor, TRILIPIX, Niaspan and Simcor are expected to total less than $1 billion in 2013. Total Established Pharmaceutical Products sales decreased in 2012 due to the negative effect of exchange and decreased sales of Clarithromycin and Serc due to, in part, pricing pressures in Europe, partially offset by growth in emerging markets.  Excluding the effect of exchange, Total Established Pharmaceutical Products sales increased 2.7 percent.  U.S. Pediatric Nutritional sales in 2012 reflect market share gains for Similac and unit growth for PediaSure while 2011 sales were affected by the voluntary recall of certain Similac-brand powder infant formulas, primarily in the U.S. in September 2010.  The increase in 2012 U.S. Adult Nutritional sales reflects unit growth for the Ensure and Glucerna products.  International Pediatric and International Adult Nutritionals sales increased in 2012 and 2011 due primarily to volume growth in developing countries. The relatively weaker U.S. dollar increased International Pediatric sales and International Adult Nutritional sales in 2011 by 4.2 percent and 6.2 percent,

 

16



 

FINANCIAL REVIEW

(continued)

 

respectively.  In addition to the product increases listed above, the 2011 growth in U.S. Proprietary product sales is due to the acquisition of Solvay Pharmaceuticals in February 2010.

 

The gross profit margin was 62.2 percent for the third quarter of 2012 compared to 59.5 percent in 2011.  First nine months 2012 gross profit margin was 61.9 percent compared to 58.9 percent for the first nine months 2011.  Gross profit margins in 2012 were impacted by improved gross margins across all reportable segments as a result of cost reduction initiatives, the impact of exchange and favorable product mix.

 

Research and development expenses increased 15.3 percent in the third quarter 2012 and 6.8 percent for the first nine months 2012 over comparable 2011 periods.  These increases reflect primarily restructuring charges recorded in the third quarter of 2012.  Excluding any restructuring charges in both periods, research and development expenses for the third quarter and first nine months 2012 increased 0.3 percent and 5.4 percent, respectively, over comparable 2011 periods.   These increases reflect continued pipeline spending, including programs in biologics, hepatitis C and diagnostics.  The majority of research and development expenditures are concentrated on pharmaceutical products. $2.2 billion of Abbott’s research and development expenses for the nine months ended September 30, 2012 related to Abbott’s pharmaceutical products, of which $1.7 billion was directly allocated to the Proprietary Pharmaceutical Products segment.  For the first nine months ended September 30, 2012, research and development expenditures totaled $279 million for the Vascular Products segment, $271 million for the Diagnostics Products segment, $201 million for the Established Pharmaceutical Products segment and $133 million for the Nutritional Products segment.

 

Selling, general and administrative expenses for the third quarter and first nine months of 2011 include a litigation charge of $1.5 billion related to the government investigation related to Depakote.  In addition, Selling, general and administrative expenses in both years include charges for restructuring and integration activities and 2012 includes separation expenses.  Excluding the effect of these items, Selling, general and administrative expenses for the third quarter and first nine months 2012 increased 0.8 percent and 4.3 percent, respectively, over the comparable 2011 periods.  The increases reflect increased selling and marketing support for new and existing products, including spending for HUMIRA and inflation.

 

On October 17, 2012, Reata Pharmaceuticals informed Abbott that it is discontinuing the Phase III clinical study, known as BEACON, designed to evaluate bardoxolone methyl in diabetic patients with advanced chronic kidney disease.  The discontinuation is based on a recommendation from the study’s Independent Data Monitoring Committee regarding safety concerns due to “excess serious adverse events and mortality in the bardoxolone methyl arm.”  Reata and Abbott will closely examine the data from this study to determine whether there is an appropriate path forward for the development of bardoxolone methyl in chronic kidney disease or other indications.  Abbott has the rights to bardoxolone methyl outside the U.S., excluding certain Asian markets.  At September 30, 2012, Abbott holds a $124 million equity investment in Reata and is evaluating the impact of this event on the carrying value of the investment.

 

Business Combinations and Technology Acquisitions

 

In the second quarter of 2012, Abbott recorded a charge to acquired in-process and collaborations research and development of $110 million as a result of the acquisition of AP214, a drug under development for the prevention of acute kidney injury associated with major cardiac surgery in patients at increased risk.  In the first quarter of 2012, Abbott recorded a charge to acquired in-process and collaborations research and development of $150 million as a result of entering into a global collaboration to develop and commercialize an oral, next-generation JAK1 inhibitor in Phase II development with the potential to treat multiple autoimmune diseases.  Additional payments of approximately $1.2 billion could be required for the achievement of certain development, regulatory and commercial milestones under this agreement.  In the fourth quarter of 2011, Abbott entered into a collaboration, with Reata on a worldwide basis, for the joint development and commercialization of second-generation oral antioxidant inflammation modulators resulting in a charge to acquired in-process and collaborations research and development of $400 million which was paid in the first quarter of 2012.  In connection with the acquisition of Solvay Pharmaceuticals, the achievement of a certain sales milestone resulted in a payment of approximately $134 million in the first quarter of 2012 for which a liability was previously established.

 

In 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.  In the first and second quarters of 2011, certain milestones were achieved and charges to acquired in-process and collaborations research and development of $100 million and $88 million were recorded.  In the first quarter of 2012, $50 million of research and development expense was recorded related to the achievement of a clinical development milestone under this agreement.   In addition, in the second quarter of 2011, Abbott entered into an agreement to

 

17



 

FINANCIAL REVIEW

(continued)

 

develop and commercialize a treatment of rheumatoid arthritis and psoriasis resulting in a charge to acquired in-process and collaborations research and development of $85 million.

 

Restructuring Plans

 

In the third quarter 2012, Abbott management approved plans to streamline various commercial operations in order to reduce costs and improve efficiencies in Abbott’s core diagnostics, established pharmaceutical and nutritionals businesses.  Abbott recorded employee related severance charges of approximately $167 million in the third quarter 2012.  Additional charges of approximately $22 million were also recorded in the third quarter 2012, primarily for asset impairments.  Approximately $70 million is recorded in Cost of products sold and approximately $119 million as Selling, general and administrative expense. As of September 30, 2012, no significant cash payments have been made relating to these actions.

 

In 2011 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.  In the first three months of 2011, Abbott recorded $49 million to Cost of products sold, $18 million to Research and development and $49 million to Selling, general and administrative.  The following summarizes the activity for these restructurings: (dollars in millions)

 

 

 

2012

 

2011

 

Accrued balance at January 1

 

$

177

 

$

77

 

Restructuring charges

 

 

116

 

Payments and other adjustments

 

(19

)

(71

)

Accrued balance at September 30

 

$

158

 

$

122

 

 

Additional charges of $83 million and $12 million were recorded in the first nine months of 2012 and 2011, respectively, relating to these restructurings, primarily for accelerated depreciation.

 

In 2012 and 2010, Abbott management approved restructuring plans primarily related to the acquisition of Solvay Pharmaceuticals.  These plans streamline operations, improve efficiencies and reduce costs in certain Solvay sites and functions as well as in certain Abbott and Solvay commercial organizations in various countries.  In the third quarter 2012, Abbott recorded a charge of approximately $150 million for employee severance and contractual obligations, primarily related to the exit from a research and development facility.  Approximately $142 million is recorded as Research and development and $8 million as Selling, general and administrative.  The following summarizes the activity for these restructuring: (dollars in millions)

 

 

 

2012

 

2011

 

Accrued balance at January 1

 

$

108

 

$

410

 

Restructuring charges

 

150

 

 

Payments and other adjustments

 

(108

)

(179

)

Accrued balance at September 30

 

$

150

 

$

231

 

 

Additional charges of approximately $29 million and $95 million were recorded in the first nine months of 2012 and 2011, respectively, relating to this restructuring, primarily for accelerated depreciation, asset impairments and employee severance.

 

In 2011 and 2008, Abbott management approved a plan to streamline global manufacturing operations, reduce overall costs, and improve efficiencies in Abbott’s core diagnostic business.  A charge of $31 million was recorded in Cost of products sold for the 2011 restructuring. The following summarizes the activity for these restructurings: (dollars in millions)

 

 

 

2012

 

2011

 

Accrued balance at January 1

 

$

79

 

$

88

 

Restructuring charges

 

 

31

 

Payments and other adjustments

 

(22

)

(27

)

Accrued balance at September 30

 

$

57

 

$

92

 

 

Additional charges of approximately $12 million and $28 million were recorded in the first nine months of 2012 and 2011, respectively, relating to this restructuring, primarily for accelerated depreciation and product transfer costs.  Additional charges will occur through 2012 as a result of product re-registration timelines required under manufacturing regulations in a number of countries and product transition timelines.

 

18



 

FINANCIAL REVIEW

(continued)

 

Interest Expense (Income)

 

Interest expense increased in the third quarter 2012 compared to 2011 due to the amortization of a bridge facility fee, as discussed below.  For the nine months ended September 30, 2012, this amortization was partially offset by the impact of lower interest rates.

 

Other (income) expense, net

 

Effective January 1, 2011, the one month lag in the consolidation of the accounts of foreign subsidiaries was eliminated and the year-end of foreign subsidiaries was changed to December 31.  In accordance with applicable accounting literature, a change in subsidiaries’ year-end is treated as a change in accounting principle and requires retrospective application.  The impact of the change was not material to the results of operations for the previously reported annual and interim periods after January 1, 2009, and thus, those results have not been revised.  A charge of $137 million was recorded to Other (income) expense, net in the first three months of 2011 to recognize the cumulative immaterial impacts to 2009 and 2010.  Other (income) expense, net, for the nine months ended September 30, 2012 includes income of approximately $60 million from the resolution of a contractual agreement.

 

Taxes on Earnings

 

Taxes on earnings reflect the estimated annual effective rates and include charges for interest and penalties.  Taxes on earnings in 2012 reflect the recognition of $386 million of tax benefits in the third quarter as a result of the favorable resolution of various tax positions pertaining to a prior year, which also decreased the gross amount of unrecognized tax benefits by approximately $540 million.  Taxes on earnings in 2011 reflect the effect of the tax rate applied to a litigation reserve in the third quarter and the recognition of $570 million of tax benefits as a result of the favorable resolution of various tax positions pertaining to prior years, which also decreased the gross amount of unrecognized tax benefits by approximately $1.2 billion.  Exclusive of these discrete items, 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.

 

Liquidity and Capital Resources September 30, 2012 Compared with December 31, 2011

 

Net cash from operating activities for the first nine months 2012 totaled approximately $7.8 billion.  Other, net in Net cash from operating activities for 2012 includes payments of approximately $800 million to settle certain government investigations and the recognition of $386 million of tax benefits in the third quarter as a result of the favorable resolution of various tax positions pertaining to a prior year.  These items were partially offset by increases in other accrued liabilities, primarily related to restructuring activities and the timing of various payments.  Other, net in Net cash from operating activities for 2011 includes the non-cash impact of a litigation accrual of $1.5 billion which was partially offset by $570 million of tax benefits related to the favorable resolution of various tax positions pertaining to prior years.  Other, net in Net cash from operating activities for 2012 and 2011 includes the effects of contributions to defined benefit plans of $360 million and $390 million, respectively, and to the post-employment medical and dental benefit plans of $40 million in each period.

 

The United States Department of Justice, through the United States Attorney for the Western District of Virginia, and various state Attorneys General investigated Abbott’s sales and marketing activities for Depakote. Abbott recorded non-cash charges of $1.5 billion in the third quarter of 2011 and $100 million in the first quarter of 2012.  In May 2012, Abbott reached resolution of all of the Depakote-related federal claims, Medicaid-related claims with 49 states and the District of Columbia, and consumer protection claims with 45 states and the District of Columbia.  In addition to the payments of approximately $800 million in the second quarter of 2012, the remaining $800 million of the settlement was paid in October 2012.  The payments did not materially affect Abbott’s liquidity as other cash flow from operations was sufficient to fund these payments.

 

19



 

FINANCIAL REVIEW

(continued)

 

Working capital was $11.0 billion at September 30, 2012 and $8.3 billion at December 31, 2011.  Substantially all of Abbott’s trade receivables in Italy, Spain, Portugal, and Greece are with governmental health systems.  Outstanding net governmental receivables in these countries at September 30, 2012 were:  (dollars in millions)

 

 

 

Net
Receivables

 

Percentage Over
One Year Past Due

 

Italy

 

$

610

 

21.5

 

Spain

 

380

 

0.4

 

Portugal

 

122

 

19.3

 

Greece

 

78

 

26.6

 

 

Abbott closely monitors economic conditions and budgetary and other fiscal developments in these countries.  Abbott regularly communicates with its customers regarding the status of receivable balances, including their payment plans and obtains positive confirmation of the validity of the receivables.  Abbott also monitors the potential for and periodically has utilized factoring arrangements to mitigate risk although such arrangements were not material in the first nine months of 2012.

 

At September 30, 2012, Abbott’s long-term debt rating was AA by Standard & Poor’s Corporation and A1 by Moody’s Investors Service.  On October 26, 2012, Moody’s confirmed its A1 rating and Standard & Poor’s reduced its rating to A+.  Abbott has readily available financial resources.  In the third quarter 2012, Abbott replaced unused lines of credit of $3.0 billion and $3.7 billion that were to expire in October 2012 and in 2013, respectively, with two five-year credit facilities totaling $7.0 billion that support commercial paper borrowing arrangements.

 

In October 2012 Abbott initiated a cash tender offer, totaling $7.7 billion, for all or a portion of nine series of its outstanding notes.  Abbott expects to incur a cost of $1.2 billion to extinguish this debt, net of estimated gains expected to result from the unwinding of interest rate swaps related to the debt.  In early November 2012 AbbVie Inc., a wholly owned subsidiary of Abbott, launched an offering of approximately $14.7 billion of long-term debt with maturities ranging from 3 to 30 years.  The debt offering is expected to close in November 2012.  AbbVie expects to issue approximately $1.0 billion of short-term debt in the fourth quarter of 2012.  The debt issued by AbbVie Inc. will be guaranteed by Abbott with the guarantee expiring when AbbVie Inc. separates from Abbott.  A $7.5 billion 364-day bridge facility is also in place to support the separation of Abbott into two companies.

 

Abbott repaid $1.5 billion and $500 million of long-term notes that were due in May and March of 2011, respectively, using primarily short-term borrowings.

 

In October 2008, the board of directors authorized the purchase of up to $5 billion of Abbott’s common shares from time to time and 27.2 million shares were purchased in the first nine months of 2012 under this authorization at a cost of approximately $1.6 billion.  No shares were purchased under this authorization in the first nine months of 2011.

 

Legislative Issues

 

In 2010, the Patient Protection and Aff