Table of Contents

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

FORM 10-Q

 

(Mark One)

 

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

 

For the quarterly period ended March 31, 2018

 

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:  (224) 667-6100

 

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, a smaller reporting company, or an emerging growth company.  See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

Large Accelerated Filer x

 

Accelerated Filer o

 

 

 

Non-Accelerated Filer o

 

Smaller reporting company o

(Do not check if a smaller reporting company)

 

 

 

 

Emerging growth companyo

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.  o

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes o  No x

 

As of March 31, 2018, Abbott Laboratories had 1,753,187,766 common shares without par value outstanding.

 

 

 



Table of Contents

 

Abbott Laboratories

 

Table of Contents

 

 

Page

 

 

Part I - Financial Information

 

 

 

Item 1. Financial Statements and Supplementary Data

 

 

 

Condensed Consolidated Statement of Earnings

3

Condensed Consolidated Statement of Comprehensive Income

4

Condensed Consolidated Balance Sheet

5

Condensed Consolidated Statement of Cash Flows

6

Notes to Condensed Consolidated Financial Statements

7

 

 

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

21

 

 

Item 4. Controls and Procedures

28

 

 

Part II - Other Information

 

 

 

Item 1. Legal Proceedings

28

 

 

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

29

 

 

Item 6. Exhibits

29

 

 

Signature

30

 

2



Table of Contents

 

Abbott Laboratories and Subsidiaries

Condensed Consolidated Statement of Earnings

(Unaudited)

(dollars in millions except per share data; shares in thousands)

 

 

 

Three Months Ended March 31

 

 

 

2018

 

2017

 

 

 

 

 

 

 

Net sales

 

$

7,390

 

$

6,335

 

 

 

 

 

 

 

Cost of products sold, excluding amortization of intangible assets

 

3,067

 

3,062

 

Amortization of intangible assets

 

584

 

522

 

Research and development

 

589

 

553

 

Selling, general and administrative

 

2,542

 

2,440

 

Total operating cost and expenses

 

6,782

 

6,577

 

 

 

 

 

 

 

Operating earnings (loss)

 

608

 

(242

)

 

 

 

 

 

 

Interest expense

 

227

 

226

 

Interest (income)

 

(28

)

(22

)

Net foreign exchange (gain) loss

 

(3

)

(16

)

Net loss on extinguishment of debt

 

14

 

 

Other (income) expense, net

 

(33

)

(1,166

)

Earnings from continuing operations before tax

 

431

 

736

 

Tax expense on earnings from continuing operations

 

22

 

350

 

Earnings from continuing operations

 

409

 

386

 

 

 

 

 

 

 

Earnings from discontinued operations, net of tax

 

9

 

33

 

 

 

 

 

 

 

Net Earnings

 

$

418

 

$

419

 

 

 

 

 

 

 

Basic Earnings Per Common Share —

 

 

 

 

 

Continuing operations

 

$

0.23

 

$

0.22

 

Discontinued operations

 

0.01

 

0.02

 

Net earnings

 

$

0.24

 

$

0.24

 

 

 

 

 

 

 

Diluted Earnings Per Common Share —

 

 

 

 

 

Continuing operations

 

$

0.23

 

$

0.22

 

Discontinued operations

 

 

0.02

 

Net earnings

 

$

0.23

 

$

0.24

 

 

 

 

 

 

 

Cash Dividends Declared Per Common Share

 

$

0.28

 

$

0.265

 

 

 

 

 

 

 

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

 

1,753,412

 

1,727,356

 

Dilutive Common Stock Options

 

11,866

 

7,839

 

Average Number of Common Shares Outstanding Plus Dilutive Common Stock Options

 

1,765,278

 

1,735,195

 

 

 

 

 

 

 

Outstanding Common Stock Options Having No Dilutive Effect

 

 

9,432

 

 

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

 

3



Table of Contents

 

Abbott Laboratories and Subsidiaries

Condensed Consolidated Statement of Comprehensive Income

(Unaudited)

(dollars in millions)

 

 

 

Three Months Ended March 31

 

 

 

2018

 

2017

 

Net earnings

 

$

418

 

$

419

 

 

 

 

 

 

 

Foreign currency translation gain (loss) adjustments

 

333

 

533

 

Net actuarial gains (losses) and amortization of net actuarial (losses) and prior service (cost) and credits, net of taxes of $17 in 2018 and $12 in 2017

 

23

 

34

 

Unrealized gains (losses) on marketable equity securities, net of taxes $53 in 2017

 

 

80

 

Net (losses) gains for derivative instruments designated as cash flow hedges, net of taxes of $(20) in 2018 and $(24) in 2017

 

(32

)

(65

)

Other comprehensive income

 

324

 

582

 

Comprehensive Income

 

$

742

 

$

1,001

 

 

 

 

 

 

 

 

 

 

March 31,

 

December 31,

 

 

 

2018

 

2017

 

Supplemental Accumulated Other Comprehensive Income (Loss) Information, net of tax:

 

 

 

 

 

Cumulative foreign currency translation (loss) adjustments

 

$

(3,119

)

$

(3,452

)

Net actuarial (losses) and prior service (cost) and credits

 

(2,498

)

(2,521

)

Cumulative unrealized (losses) gains on marketable equity securities

 

 

(5

)

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

 

(116

)

(84

)

Accumulated other comprehensive income (loss)

 

$

(5,733

)

$

(6,062

)

 

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

 

4



Table of Contents

 

Abbott Laboratories and Subsidiaries

Condensed Consolidated Balance Sheet

(Unaudited)

(dollars in millions)

 

 

 

March 31,
2018

 

December 31,
2017

 

Assets

 

 

 

 

 

Current Assets:

 

 

 

 

 

Cash and cash equivalents

 

$

3,857

 

$

9,407

 

Short-term investments

 

185

 

203

 

Trade receivables, less allowances of $321 in 2018 and $294 in 2017

 

5,356

 

5,249

 

Inventories:

 

 

 

 

 

Finished products

 

2,424

 

2,339

 

Work in process

 

536

 

472

 

Materials

 

866

 

790

 

Total inventories

 

3,826

 

3,601

 

Prepaid expenses and other receivables

 

1,720

 

1,667

 

Current assets held for disposition

 

20

 

20

 

Total Current Assets

 

14,964

 

20,147

 

Investments

 

913

 

883

 

Property and equipment, at cost

 

15,556

 

15,265

 

Less: accumulated depreciation and amortization

 

7,897

 

7,658

 

Net property and equipment

 

7,659

 

7,607

 

Intangible assets, net of amortization

 

20,943

 

21,473

 

Goodwill

 

24,227

 

24,020

 

Deferred income taxes and other assets

 

2,082

 

1,944

 

Non-current assets held for disposition

 

120

 

176

 

 

 

$

70,908

 

$

76,250

 

Liabilities and Shareholders’ Investment

 

 

 

 

 

Current Liabilities:

 

 

 

 

 

Short-term borrowings

 

$

230

 

$

206

 

Trade accounts payable

 

2,476

 

2,402

 

Salaries, wages and commissions

 

949

 

1,187

 

Other accrued liabilities

 

4,144

 

3,811

 

Dividends payable

 

492

 

489

 

Income taxes payable

 

212

 

309

 

Current portion of long-term debt

 

507

 

508

 

Total Current Liabilities

 

9,010

 

8,912

 

Long-term debt

 

21,154

 

27,210

 

Post-employment obligations, deferred income taxes and other long-term liabilities

 

9,143

 

9,030

 

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: 2018: 1,969,331,007; 2017: 1,965,908,188

 

23,223

 

23,206

 

Common shares held in treasury, at cost - Shares: 2018: 216,143,241; 2017: 222,305,719

 

(9,947

)

(10,225

)

Earnings employed in the business

 

23,856

 

23,978

 

Accumulated other comprehensive income (loss)

 

(5,733

)

(6,062

)

Total Abbott Shareholders’ Investment

 

31,399

 

30,897

 

Noncontrolling Interests in Subsidiaries

 

202

 

201

 

Total Shareholders’ Investment

 

31,601

 

31,098

 

 

 

$

70,908

 

$

76,250

 

 

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

 

5



Table of Contents

 

Abbott Laboratories and Subsidiaries

Condensed Consolidated Statement of Cash Flows

(Unaudited)

(dollars in millions)

 

 

 

Three Months Ended March 31

 

 

 

2018

 

2017

 

Cash Flow From (Used in) Operating Activities:

 

 

 

 

 

Net earnings

 

$

418

 

$

419

 

Adjustments to reconcile earnings to net cash from (used in) operating activities -

 

 

 

 

 

Depreciation

 

268

 

252

 

Amortization of intangible assets

 

584

 

522

 

Share-based compensation

 

212

 

171

 

Amortization of inventory step-up

 

32

 

392

 

Gain on sale of businesses

 

 

(1,151

)

Trade receivables

 

(53

)

30

 

Inventories

 

(171

)

(162

)

Other, net

 

(182

)

101

 

Net Cash From (Used in) Operating Activities

 

1,108

 

574

 

 

 

 

 

 

 

Cash Flow From (Used in) Investing Activities:

 

 

 

 

 

Acquisitions of property and equipment

 

(275

)

(272

)

Acquisitions of businesses and technologies, net of cash acquired

 

 

(13,027

)

Proceeds from business disposition

 

 

5,472

 

Proceeds from the sale of Mylan N.V. shares

 

 

1,685

 

Sales (purchases) of investment securities, net

 

(5

)

(15

)

Other

 

42

 

3

 

Net Cash From (Used in) Investing Activities

 

(238

)

(6,154

)

 

 

 

 

 

 

Cash Flow From (Used in) Financing Activities:

 

 

 

 

 

Net proceeds (repayments of) short-term debt and other

 

6

 

(1,455

)

Repayments of long-term debt

 

(5,979

)

(2,505

)

Payment of contingent consideration

 

 

(13

)

Purchases of common shares

 

(128

)

(95

)

Proceeds from stock options exercised

 

137

 

129

 

Dividends paid

 

(491

)

(460

)

Net Cash From (Used in) Financing Activities

 

(6,455

)

(4,399

)

 

 

 

 

 

 

Effect of exchange rate changes on cash and cash equivalents

 

35

 

65

 

 

 

 

 

 

 

Net Decrease in Cash and Cash Equivalents

 

(5,550

)

(9,914

)

Cash and Cash Equivalents, Beginning of Year

 

9,407

 

18,620

 

Cash and Cash Equivalents, End of Period

 

$

3,857

 

$

8,706

 

 

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

 

6



Table of Contents

 

Abbott Laboratories and Subsidiaries

 

Notes to Condensed Consolidated Financial Statements

 

March 31, 2018

 

(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, 2017.  The condensed consolidated financial statements include the accounts of the parent company and subsidiaries, after elimination of intercompany transactions.

 

Note 2 — New Accounting Standards

 

Recently Adopted Accounting Standards

 

In March 2017, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2017-07, Compensation — Retirement Benefits (Topic 715): Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost which changes the financial statement presentation requirements for pension and other postretirement benefit expense.  While service cost continues to be reported in the same financial statement line items as other current employee compensation costs, the ASU requires all other components of pension and other postretirement benefit expense to be presented separately from service cost, and outside any subtotal of income from operations. Abbott adopted the standard in the first quarter of 2018 and the Condensed Consolidated Statement of Earnings was retrospectively adjusted, resulting in the reclassification of $40 million of income from Operating earnings (loss) to Other (income) expense, net in the first quarter of 2017.

 

In November 2016, the FASB issued ASU 2016-18, Statement of Cash Flows: Restricted Cash, which requires that restricted cash be included with cash and cash equivalents when reconciling the beginning and end-of-period total amounts shown on the statement of cash flows. Abbott adopted this standard beginning in the first quarter of 2018, and applied the guidance retrospectively to all periods presented. Abbott did not have any restricted cash balances in the periods presented except for $75 million of restricted cash acquired as part of the Alere Inc. acquisition in October 2017. The restrictions on this cash were eliminated prior to the end of 2017.

 

In October 2016, the FASB issued ASU 2016-16, Income Taxes (Topic 740): Intra-Entity Transfers of Assets Other Than Inventory, which requires the recognition of the income tax effects of intercompany sales and transfers of assets, other than inventory, in the period in which the transfer occurs. Abbott adopted the standard on January 1, 2018, using a modified retrospective approach and recorded a cumulative catch-up adjustment to Earnings employed in the business in the Condensed Consolidated Balance Sheet that was not significant.

 

In August 2016, the FASB issued ASU 2016-15, Statement of Cash Flows: Classification of Certain Cash Receipts and Cash Payments, which clarifies how companies should present and classify certain cash receipts and cash payments in the statement of cash flows. The ASU became effective for Abbott in the first quarter of 2018 and did not have a material impact to the Company’s Condensed Consolidated Statement of Cash Flows.

 

In January 2016, the FASB issued ASU 2016-01, Financial Instruments — Recognition and Measurement of Financial Assets and Financial Liabilities, which provides new guidance for the recognition, measurement, presentation, and disclosure of financial assets and liabilities. Abbott adopted the standard on January 1, 2018. Under the new standard, changes in the fair value of equity investments with readily determinable fair values are recorded in Other (income) expense, net within the Consolidated Statement of Earnings. Previously, such fair value changes were recorded in other comprehensive income.  Abbott has elected the measurement alternative allowed by ASU 2016-01 for its equity investments without readily determinable fair values. These investments are measured at cost, less any impairment, plus or minus any changes resulting from observable price changes in orderly transactions for an identical or similar investment of the same issuer. Changes in the measurement of these investments will be recorded in Other (income) expense, net within the Statement of Earnings. As part of the adoption, the cumulative-effect adjustment to Earnings employed in the business in the Condensed Consolidated Balance Sheet for net unrealized losses on equity investments that were recorded in Accumulated other comprehensive income (loss) as of December 31, 2017 was not significant.

 

7



Table of Contents

 

Abbott Laboratories and Subsidiaries

 

Notes to Condensed Consolidated Financial Statements

 

March 31, 2018

 

(Unaudited)

 

In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers, which provides a single comprehensive model for accounting for revenue from contracts with customers and supersedes nearly all previously existing revenue recognition guidance. The core principle of the ASU is that an entity should recognize revenue when it transfers promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. Abbott adopted the new standard as of January 1, 2018, using the modified retrospective approach method. Under this method, entities recognize the cumulative effect of applying the new standard at the date of initial application with no restatement of comparative periods presented. The cumulative effect of applying the new standard resulted in an increase to Earnings employed in the business in the Condensed Consolidated Balance Sheet of $23 million which was recorded on January 1, 2018. The new standard has been applied only to those contracts that were not completed as of January 1, 2018. The impact of adopting ASU 2014-09 was not significant to individual financial statement line items in the Condensed Consolidated Balance Sheet and Condensed Consolidated Statement of Earnings.

 

Recent Accounting Standards Not Yet Adopted

 

In February 2018, the FASB issued ASU 2018-02, Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income, which allows companies to reclassify stranded tax effects resulting from the 2017 Tax Cuts and Jobs Act, from accumulated other comprehensive income to retained earnings. The standard becomes effective for Abbott beginning in the first quarter of 2019 and early adoption is permitted. Abbott is currently evaluating the impact the new guidance will have on its consolidated financial statements.

 

In August 2017, the FASB issued ASU 2017-12, Targeted Improvements to Accounting for Hedging Activities, which makes changes to the designation and measurement guidance for qualifying hedging relationships and the presentation of hedge results.  The standard becomes effective for Abbott beginning in the first quarter of 2019 and early adoption is permitted. Abbott is currently evaluating the effect that the new guidance will have on its consolidated financial statements.

 

In February 2016, the FASB issued ASU 2016-02, Leases, which requires lessees to recognize assets and liabilities for most leases on the balance sheet. The standard becomes effective for Abbott beginning in the first quarter of 2019 and early adoption is permitted. Adoption requires application of the new guidance for all periods presented. Abbott is currently evaluating the impact the new guidance will have on its consolidated financial statements.

 

Note 3 — Revenue

 

Abbott’s revenues are derived primarily from the sale of a broad line of health care products under short-term receivable arrangements. Patent protection and licenses, technological and performance features, and inclusion of Abbott’s products under a contract most impact which products are sold; price controls, competition and rebates most impact the net selling prices of products; and foreign currency translation impacts the measurement of net sales and costs. Abbott’s products are generally sold directly to retailers, wholesalers, hospitals, health care facilities, laboratories, physicians’ offices and government agencies throughout the world. Abbott has four reportable segments: Established Pharmaceutical Products, Diagnostic Products, Nutritional Products, and Cardiovascular and Neuromodulation Products.  Diabetes Care is a non-reportable segment and is included in Other in the following table.

 

8



Table of Contents

 

Abbott Laboratories and Subsidiaries

 

Notes to Condensed Consolidated Financial Statements

 

March 31, 2018

 

(Unaudited)

 

The following table provides detail by sales category:

 

 

 

2018

 

2017

 

(in millions)

 

U.S.

 

Int’l

 

Total

 

U.S.

 

Int’l

 

Total

 

Established Pharmaceutical Products —

 

 

 

 

 

 

 

 

 

 

 

 

 

Key Emerging Markets

 

$

 

$

793

 

$

793

 

$

 

$

730

 

$

730

 

Other

 

 

251

 

251

 

 

220

 

220

 

Total

 

 

1,044

 

1,044

 

 

950

 

950

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Nutritionals —

 

 

 

 

 

 

 

 

 

 

 

 

 

Pediatric Nutritionals

 

448

 

546

 

994

 

432

 

495

 

927

 

Adult Nutritionals

 

310

 

452

 

762

 

298

 

417

 

715

 

Total

 

758

 

998

 

1,756

 

730

 

912

 

1,642

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Diagnostics —

 

 

 

 

 

 

 

 

 

 

 

 

 

Core Laboratory

 

228

 

791

 

1,019

 

216

 

695

 

911

 

Molecular

 

39

 

79

 

118

 

45

 

67

 

112

 

Point of Care

 

110

 

31

 

141

 

110

 

25

 

135

 

Rapid Diagnostics

 

323

 

236

 

559

 

 

 

 

Total

 

700

 

1,137

 

1,837

 

371

 

787

 

1,158

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cardiovascular and Neuromodulation —

 

 

 

 

 

 

 

 

 

 

 

 

 

Rhythm Management

 

264

 

271

 

535

 

260

 

251

 

511

 

Electrophysiology

 

182

 

209

 

391

 

145

 

171

 

316

 

Heart Failure

 

114

 

39

 

153

 

109

 

33

 

142

 

Vascular

 

286

 

453

 

739

 

304

 

399

 

703

 

Structural Heart

 

109

 

184

 

293

 

107

 

149

 

256

 

Neuromodulation

 

168

 

44

 

212

 

136

 

39

 

175

 

Total

 

1,123

 

1,200

 

2,323

 

1,061

 

1,042

 

2,103

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other

 

94

 

336

 

430

 

162

 

320

 

482

 

Total

 

$

2,675

 

$

4,715

 

$

7,390

 

$

2,324

 

$

4,011

 

$

6,335

 

 

Abbott recognizes revenue from product sales upon the transfer of control, which is generally upon shipment or delivery, depending on the delivery terms set forth in the customer contract. For maintenance agreements that provide service beyond Abbott’s standard warranty and other service agreements, revenue is recognized ratably over the contract term. A time-based measure of progress appropriately reflects the transfer of services to the customer. Payment terms between Abbott and its customers vary by the type of customer, country of sale, and the products or services offered. The term between invoicing and the payment due date is not significant.

 

Management exercises judgment in estimating variable consideration. Provisions for discounts, rebates and sales incentives to customers, and returns and other adjustments are provided for in the period the related sales are recorded. Sales incentives to customers are not material. Historical data is readily available and reliable, and is used for estimating the amount of the reduction in gross sales. Abbott provides rebates to government agencies, wholesalers, group purchasing organizations and other private entities.

 

Rebate amounts are usually based upon the volume of purchases using contractual or statutory prices for a product. Factors used in the rebate calculations include the identification of which products have been sold subject to a rebate, which customer or government agency price terms apply, and the estimated lag time between sale and payment of a rebate. Using historical trends, adjusted for current changes, Abbott estimates the amount of the rebate that will be paid, and records the liability as a reduction of gross sales when Abbott records its sale of the product. Settlement of the rebate generally occurs from one to six months after sale. Abbott regularly analyzes the historical rebate trends and makes adjustments to reserves for changes in trends and terms of rebate programs. Historically, adjustments to prior years’ rebate accruals have not been material to net income.

 

Other allowances charged against gross sales include cash discounts and returns, which are not significant. Cash discounts are known within 15 to 30 days of sale, and therefore can be reliably estimated. Returns can be reliably estimated because Abbott’s historical returns are low, and because sales return terms and other sales terms have remained relatively unchanged for several periods. Product warranties are also not significant.

 

9



Table of Contents

 

Abbott Laboratories and Subsidiaries

 

Notes to Condensed Consolidated Financial Statements

 

March 31, 2018

 

(Unaudited)

 

Abbott also applies judgment in determining the timing of revenue recognition related to contracts that include multiple performance obligations. The total transaction price of the contract is allocated to each performance obligation in an amount based on the estimated relative standalone selling prices of the promised goods or services underlying each performance obligation. For goods or services for which observable standalone selling prices are not available, Abbott uses an expected cost plus a margin approach to estimate the standalone selling price of each performance obligation.

 

Remaining Performance Obligations

 

As of March 31, 2018, the estimated revenue expected to be recognized in the future related to performance obligations that are unsatisfied (or partially unsatisfied) was approximately $2.9 billion in the Diagnostics segment and approximately $340 million in the Cardiovascular and Neuromodulation segment. Abbott expects to recognize revenue on approximately 60% of these remaining performance obligations over the next 24 months, approximately 15% over the subsequent 12 months and the remainder thereafter.

 

These performance obligations primarily reflect the future sale of reagents/consumables in contracts with minimum purchase obligations, extended warranty or service obligations related to previously sold equipment, and remote monitoring services related to previously implanted devices. Abbott has applied the practical expedient described in Accounting Standards Codification (ASC) 606-10-50-14 and has not included remaining performance obligations related to contracts with original expected durations of one year or less in the amounts above.

 

Assets Recognized for Costs to Obtain a Contract with a Customer

 

Abbott has applied the practical expedient in ASC 340-40-25-4 and records as an expense the incremental costs of obtaining contracts with customers in the period of occurrence when the amortization period of the asset that Abbott otherwise would have recognized is one year or less. Upfront commission fees paid to sales personnel as a result of obtaining or renewing contracts with customers are incremental to obtaining the contract. Abbott capitalizes these amounts as contract costs. Capitalized commission fees are amortized based on the contract duration to which the assets relate which ranges from two to ten years. The amounts as of March 31, 2018, were not significant.

 

Additionally, the cost of transmitters provided to customers that use Abbott’s remote monitoring service with respect to certain medical devices are capitalized as contract costs. Capitalized transmitter costs are amortized based on the timing of the transfer of services to which the assets relate, which typically ranges from eight to ten years. The amounts as of March 31, 2018, were not significant.

 

Other Contract Assets and Liabilities

 

Abbott discloses Trade receivables separately in the Condensed Consolidated Balance Sheet at their net realizable value. Contract assets primarily relate to Abbott’s conditional right to consideration for work completed but not billed at the reporting date. Contract assets at the beginning and end of the period, as well as the changes in the balance, were not significant.

 

Contract liabilities primarily relate to payments received from customers in advance of performance under the contract. Abbott’s contract liabilities arise primarily in the cardiovascular and neuromodulation reportable segment when payment is received upfront for various multi-period extended service arrangements. Changes in the contract liabilities during the period are as follows:

 

(in millions)

 

March 31,

 

Contract Liabilities

 

2018

 

Balance at January 1, 2018

 

$

198

 

Unearned revenue from cash received during the period

 

84

 

Revenue recognized that was included in contract liability balance at beginning of period

 

(43

)

Balance at March 31, 2018

 

$

239

 

 

10



Table of Contents

 

Abbott Laboratories and Subsidiaries

 

Notes to Condensed Consolidated Financial Statements

 

March 31, 2018

 

(Unaudited)

 

Note 4 — Discontinued Operations

 

On January 1, 2013, Abbott completed the separation of AbbVie Inc. (AbbVie), which was formed to hold Abbott’s research-based proprietary pharmaceuticals business. Abbott has retained all liabilities for all U.S. federal and foreign income taxes on income prior to the separation, as well as certain non-income related taxes attributable to AbbVie’s business prior to the separation. AbbVie generally will be liable for all other taxes attributable to its business. Earnings from discontinued operations reflect the recognition of a net tax benefit of $9 million and $33 million in the first quarter of 2018 and 2017, respectively, as a result of the resolution of various tax positions primarily related to AbbVie’s operations for years prior to the separation.

 

Note 5 — Assets Held for Disposition

 

As discussed in Note 8 - Business Acquisitions, in conjunction with the acquisition of Alere Inc. (Alere), Abbott sold the Triage MeterPro cardiovascular and toxicology business and the assets and liabilities related to its B-type Natriuretic Peptide assay business run on Beckman Coulter analyzers to Quidel Corporation (Quidel).  The legal transfer of certain assets and liabilities related to these businesses did not occur at the close of the sale to Quidel due to, among other factors, the time required to transfer marketing authorizations and other regulatory requirements in various countries.  Under the terms of the sale agreement with Abbott, Quidel is subject to the risks and entitled to the benefits generated by these operations and assets.  The assets presented as held for disposition in the Condensed Consolidated Balance Sheet as of March 31, 2018 and December 31, 2017, primarily relate to the businesses sold to Quidel.

 

(in millions)

 

March 31,
2018

 

December 31,
2017

 

Trade receivables, net

 

$

15

 

$

12

 

Total inventories

 

5

 

8

 

Current assets held for disposition

 

20

 

20

 

Net property and equipment

 

 

56

 

Intangible assets, net of amortization

 

18

 

18

 

Goodwill

 

102

 

102

 

Non-current assets held for disposition

 

120

 

176

 

Total assets held for disposition

 

$

140

 

$

196

 

 

Note 6 — Supplemental Financial Information

 

Shares of unvested restricted stock that contain non-forfeitable rights to dividends are treated as participating securities and are included in the computation of earnings per share under the two-class method.  Under the two-class method, net earnings are allocated between common shares and participating securities. Earnings from Continuing Operations allocated to common shares for the three months ended March 31, 2018 and 2017 were $406 million and $384 million, respectively.  Net earnings allocated to common shares for the three months ended March 31, 2018 and 2017 were $415 million and $417 million, respectively.

 

Other, net in Net cash from operating activities in the Condensed Consolidated Statement of Cash Flows for the first three months of 2018 includes the payment of cash taxes of approximately $220 million. The first three months of 2017 includes the effect of contributions to defined benefit plans of $283 million.  The first quarter of 2017 also includes the impact of approximately $430 million of tax expense related to business dispositions, partially offset by cash taxes paid of approximately $160 million.

 

In February 2017, Abbott completed the sale of Abbott Medical Optics (AMO) to Johnson & Johnson and recognized a pre-tax gain of $1.151 billion, which is reported in Other (income) expense, net within the Condensed Consolidated Statement of Earnings in the first quarter of 2017. Abbott recorded an after-tax gain of $721 million in the first quarter of 2017 related to the sale of AMO.  The operating results of AMO up through the date of sale continued to be included in Earnings from Continuing Operations as they did not qualify for reporting as discontinued operations. For the three months ended March 31, 2017, AMO’s losses before taxes were $18 million.

 

In March 2017, Abbott sold 44 million of the ordinary shares of Mylan N.V. received upon the sale of its developed markets branded generics pharmaceuticals business to Mylan Inc.  Abbott received $1.685 billion in proceeds from the sale of these shares. Abbott recorded an immaterial pre-tax gain, which was recognized in Other (income) expense, net within the Condensed Consolidated Statement of Earnings.

 

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Table of Contents

 

Abbott Laboratories and Subsidiaries

 

Notes to Condensed Consolidated Financial Statements

 

March 31, 2018

 

(Unaudited)

 

The components of long-term investments as of March 31, 2018 and December 31, 2017 are as follows:

 

Long-term Investments

 

March 31,

 

December 31,

 

(in millions)

 

2018

 

2017

 

Equity securities

 

$

830

 

$

797

 

Other

 

83

 

86

 

Total

 

$

913

 

$

883

 

 

Abbott’s equity securities as of March 31, 2018, include approximately $366 million of investments in mutual funds that are held in a rabbi trust and were acquired as part of the St. Jude Medical, Inc. (St. Jude Medical) business acquisition. These investments, which are specifically designated as available for the purpose of paying benefits under a deferred compensation plan, are not available for general corporate purposes and are subject to creditor claims in the event of insolvency.

 

Abbott also holds certain investments with a carrying value of approximately $255 million that are accounted for under the equity method of accounting and other equity investments with a carrying value of approximately $195 million that do not have a readily determinable fair value.

 

Note 7 — Other Comprehensive Income

 

The components of the changes in other comprehensive income from continuing operations, net of income taxes, are as follows:

 

 

 

Three Months Ended March 31

 

(in millions)

 

Cumulative Foreign
Currency Translation
Adjustments

 

Net Actuarial
Losses and Prior
Service Costs and
Credits

 

Cumulative
Unrealized Gains
(Losses) on
Marketable Equity
Securities

 

Cumulative Gains
(Losses) on
Derivative
Instruments
Designated as Cash
Flow Hedges

 

 

 

2018

 

2017

 

2018

 

2017

 

2018

 

2017

 

2018

 

2017

 

Balance at December 31, 2017 and 2016

 

$

(3,452

)

$

(4,959

)

$

(2,521

)

$

(2,284

)

$

(5

)

$

(69

)

$

(84

)

$

49

 

Reclassified to Earnings employed in the business for adoption of ASU 2016-01

 

 

 

 

 

5

 

 

 

 

Impact of business dispositions

 

 

142

 

 

6

 

 

 

 

1

 

Other comprehensive (loss) income before reclassifications

 

333

 

533

 

(10

)

 

 

181

 

(52

)

(69

)

Amounts reclassified from accumulated other comprehensive income

 

 

 

33

 

34

 

 

(101

)

20

 

4

 

Net current period comprehensive income (loss)

 

333

 

533

 

23

 

34

 

 

80

 

(32

)

(65

)

Balance at March  31

 

$

(3,119

)

$

(4,284

)

$

(2,498

)

$

(2,244

)

$

 

$

11

 

$

(116

)

$

(15

)

 

Reclassified amounts for foreign currency translation are recorded in the Condensed Consolidated Statement of Earnings as Net foreign exchange (gain) loss; gains (losses) on marketable equity securities as Other (income) expense, net and cash flow hedges as Cost of products sold.  Net actuarial losses and prior service cost is included as a component of net periodic benefit plan costs; see Note 15 for additional details.

 

Note 8 — Business Acquisitions

 

On January 4, 2017, Abbott completed the acquisition of St. Jude Medical, a global medical device manufacturer, for approximately $23.6 billion, including approximately $13.6 billion in cash and approximately $10 billion in Abbott common shares, which represented approximately 254 million shares of Abbott common stock, based on Abbott’s closing stock price on the acquisition date. As part of the acquisition, approximately $5.9 billion of St. Jude Medical’s debt was assumed, repaid or refinanced by Abbott.  The acquisition provides expanded opportunities for future growth and is an important part of the company’s ongoing effort to develop a strong, diverse portfolio of devices, diagnostics, nutritionals and branded generic pharmaceuticals.  The combined business competes in nearly every area of the cardiovascular device market, as well as in the neuromodulation market.

 

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Table of Contents

 

Abbott Laboratories and Subsidiaries

 

Notes to Condensed Consolidated Financial Statements

 

March 31, 2018

 

(Unaudited)

 

Under the terms of the agreement, for each St. Jude Medical common share, St. Jude Medical shareholders received $46.75 in cash and 0.8708 of an Abbott common share.  At an Abbott stock price of $39.36, which reflects the closing price on January 4, 2017, this represented a value of approximately $81 per St. Jude Medical common share and total purchase consideration of $23.6 billion.  The cash portion of the acquisition was funded through a combination of medium and long-term debt issued in November 2016 and a $2.0 billion 120-day senior unsecured bridge term loan facility which was subsequently repaid.

 

In 2016, Abbott and St. Jude Medical agreed to sell certain businesses to Terumo Corporation (Terumo) for approximately $1.12 billion.  The sale included the St. Jude Medical Angio-Seal™ and Femoseal™ vascular closure and Abbott’s Vado® Steerable Sheath businesses. The sale closed on January 20, 2017 and no gain or loss was recorded in the Condensed Consolidated Statement of Earnings.

 

On October 3, 2017, Abbott acquired Alere Inc. (Alere), a diagnostic device and service provider, for $51.00 per common share in cash, which equated to a purchase price of approximately $4.5 billion.  As part of the acquisition, Abbott tendered for Alere’s preferred shares for a total value of approximately $0.7 billion.  In addition, approximately $3.0 billion of Alere’s debt was assumed and subsequently repaid.  The acquisition establishes Abbott as a leader in point of care testing, expands Abbott’s global diagnostics presence and provides access to new products, channels and geographies. Abbott utilized a combination of cash on hand and debt to fund the acquisition.

 

The preliminary allocation of the fair value of the Alere acquisition is shown in the table below. The allocation of the fair value of the acquisition will be finalized when the valuation is completed and differences between the preliminary and final allocation could be material.

 

(in billions)

 

 

 

Acquired intangible assets, non-deductible

 

$

3.5

 

Goodwill, non-deductible

 

4.1

 

Acquired net tangible assets

 

0.9

 

Deferred income taxes recorded at acquisition

 

(0.7

)

Net debt

 

(2.6

)

Preferred stock

 

(0.7

)

Total preliminary allocation of fair value

 

$

4.5

 

 

The goodwill is primarily attributable to expected synergies from combining operations, as well as intangible assets that do not qualify for separate recognition. The goodwill is identifiable to the Diagnostic Products reportable segment. The acquired tangible assets consist primarily of trade accounts receivable of approximately $430 million, inventory of approximately $425 million, other current assets of $206 million, property and equipment of approximately $540 million, and other long-term assets of $112 million. The acquired tangible liabilities consist of trade accounts payable and other current liabilities of approximately $625 million and other non-current liabilities of approximately $160 million.

 

In the third quarter of 2017, Alere entered into agreements to sell its Triage MeterPro cardiovascular and toxicology business and the assets and liabilities related to its B-type Natriuretic Peptide assay business run on Beckman Coulter analyzers to Quidel Corporation (Quidel).  The transactions with Quidel reflect a total purchase price of $400 million payable at the close of the transaction, $240 million payable in six annual installments beginning approximately six months after the close of the transaction, and contingent consideration with a maximum value of $40 million. In the third quarter of 2017, Alere entered into an agreement with Siemens Diagnostics Holding II B.V. (Siemens) to sell its subsidiary, Epocal Inc., for approximately $200 million payable at the close of the transaction. Alere agreed to divest these businesses in connection with the review by the Federal Trade Commission and the European Commission of Abbott’s agreement to acquire Alere. The sale to Quidel closed on October 6, 2017, and the sale to Siemens closed on October 31, 2017. No gain or loss on these sales was recorded in the Consolidated Statement of Earnings.

 

On July 17, 2017, Abbott commenced a tender offer to purchase for cash the 1.77 million outstanding shares of Alere’s Series B Convertible Perpetual Preferred Stock at a price of $402 per share, plus accrued but unpaid dividends to, but not including, the settlement date of the tender offer. This tender offer was subject to the satisfaction of certain conditions, including Abbott’s acquisition of Alere and upon there being validly tendered (and not properly withdrawn) at the expiration date of the tender offer that number of shares of Preferred Stock that equaled at least a majority of the Preferred Stock issued and outstanding at the expiration of the tender offer.  The tender offer expired on October 3, 2017.  All conditions to the offer were satisfied and Abbott accepted for payment the 1.748 million shares of Preferred Stock that were validly tendered (and not properly withdrawn).  The remaining shares were cashed out for an amount equal to the $400.00 per share liquidation preference of such shares, plus accrued but unpaid dividends, without interest.  Payment for all of the shares of Preferred Stock was made in the fourth quarter of 2017.

 

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Table of Contents

 

Abbott Laboratories and Subsidiaries

 

Notes to Condensed Consolidated Financial Statements

 

March 31, 2018

 

(Unaudited)

 

Note 9 — Goodwill and Intangible Assets

 

The total amount of goodwill reported was $24.2 billion at March 31, 2018 and $24.0 billion at December 31, 2017.  The amounts reported at March 31, 2018 and December 31, 2017 exclude goodwill reported in non-current assets held for disposition.  Foreign currency translation adjustments increased goodwill by approximately $204 million in the first quarter of 2018. The amount of goodwill related to reportable segments at March 31, 2018 was $3.3 billion for the Established Pharmaceutical Products segment, $286 million for the Nutritional Products segment, $4.1 billion for the Diagnostic Products segment, and $15.6 billion for the Cardiovascular and Neuromodulation Products segment.  There was no reduction of goodwill relating to impairments in the first quarter of 2018.

 

The gross amount of amortizable intangible assets, primarily product rights and technology was $25.8 billion as of March 31, 2018 and $25.6 billion as of December 31, 2017, and accumulated amortization was $8.7 billion as of March 31, 2018 and $8.1 billion as of December 31, 2017.  Purchase price allocation adjustments and foreign currency translation adjustments increased intangible assets by $100 million and $53 million, respectively, during the quarter.  The March 31, 2018 and December 31, 2017 amounts exclude net intangible assets reported in non-current assets held for disposition.

 

Indefinite-lived intangible assets, which relate to in-process research and development acquired in a business combination, were approximately $3.8 billion and $3.9 billion as of March 31, 2018 and December 31, 2017, respectively. The decrease in indefinite-lived intangible assets during the quarter relates to purchase price allocation adjustments associated with the Alere acquisition.  Abbott’s estimated annual amortization expense for intangible assets is approximately $2.4 billion in 2018, $2.3 billion in 2019, $2.1 billion in 2020, $2.0 billion in 2021 and $2.0 billion in 2022. Amortizable intangible assets are amortized over 2 to 20 years (weighted average 14 years).

 

Note 10 — Restructuring Plans

 

In 2017 and 2018, Abbott management approved restructuring plans as part of the integration of the acquisitions of St. Jude Medical into the cardiovascular and neuromodulation segment and Alere into the diagnostics segment, in order to leverage economies of scale and reduce costs. In the first three months of 2018, charges of approximately $23 million, including one-time employee termination benefits were recognized, of which approximately $3 million is recorded in Cost of products sold, approximately $8 million is recorded in Research and development and approximately $12 million as Selling, general and administrative expense.  The following summarizes the activity for the first three months of 2018 related to these actions and the status of the related accrual as of March 31, 2018:

 

(in millions)

 

 

 

Accrued balance at December 31, 2017

 

$

68

 

Restructuring charges recorded in 2018

 

23

 

Payments and other adjustments

 

(25

)

Accrued balance at March 31, 2018

 

$

66

 

 

From 2014 to 2018, Abbott management approved plans to streamline operations in order to reduce costs and improve efficiencies in various Abbott businesses including the nutritional, established pharmaceuticals and vascular businesses. In the first three months of 2018, charges of approximately $10 million were recognized, of which approximately $7 million is recorded in Cost of products sold and approximately $3 million as Selling, general and administrative expense. The following summarizes the activity for the first three months of 2018 related to these restructuring actions and the status of the related accrual as of March 31, 2018:

 

(in millions)

 

 

 

Accrued balance at December 31, 2017

 

$

141

 

Restructuring charges recorded in 2018

 

10

 

Payments and other adjustments

 

(20

)

Accrued balance at March 31, 2018

 

$

131

 

 

14



Table of Contents

 

Abbott Laboratories and Subsidiaries

 

Notes to Condensed Consolidated Financial Statements

 

March 31, 2018

 

(Unaudited)

 

Note 11 — Incentive Stock Programs

 

In the first three months of 2018, Abbott granted 5,505,363 stock options, 861,129 restricted stock awards and 7,652,605 restricted stock units under its incentive stock programs.  At March 31, 2018, approximately 143 million shares were reserved for future grants.  Information regarding the number of options outstanding and exercisable at March 31, 2018 is as follows:

 

 

 

Outstanding

 

Exercisable

 

Number of shares

 

36,582,743

 

23,261,149

 

Weighted average remaining life (years)

 

6.7

 

5.7

 

Weighted average exercise price

 

$

41.14

 

$

37.17

 

Aggregate intrinsic value (in millions)

 

$

687

 

$

529

 

 

The total unrecognized share-based compensation cost at March 31, 2018 amounted to approximately $589 million which is expected to be recognized over the next three years.

 

Note 12 — Debt and Lines of Credit

 

On January 5, 2018, Abbott paid off its $2.8 billion 5-year term loan and the remaining $1.150 billion balance under its revolving credit agreement.

 

On February 16, 2018, the board of directors authorized the redemption of up to $5 billion of currently outstanding long-term notes in addition to the $3.95 billion repaid in January 2018.

 

On March 22, 2018, Abbott redeemed all of the $947 million principal amount of its 5.125% Notes due 2019, as well as $1.055 billion of the $2.850 billion principal amount of its 2.35% Notes due 2019. Abbott incurred a net charge of $14 million related to the early repayment of this debt.

 

Note 13 — Financial Instruments, Derivatives and Fair Value Measures

 

Certain Abbott foreign subsidiaries enter into foreign currency forward exchange contracts to manage exposures to changes in foreign exchange rates for anticipated intercompany purchases by those subsidiaries whose functional currencies are not the U.S. dollar.  These contracts, with gross notional amounts totaling $3.0 billion at March 31, 2018 and $3.3 billion at December 31, 2017 are designated as cash flow hedges of the variability of the cash flows due to changes in foreign exchange rates and are recorded at fair value.  Accumulated gains and losses as of March 31, 2018 will be included in Cost of products sold at the time the products are sold, generally through the next twelve to eighteen months.  The amount of hedge ineffectiveness was not significant in 2018 and 2017.

 

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 including the British pound, in exchange for primarily U.S. dollars and other European currencies.  For intercompany and trade payables and receivables, the currency exposures are primarily the U.S. dollar and European currencies.  At March 31, 2018 and December 31, 2017, Abbott held the gross notional amount of $18.1 billion and $20.1 billion, respectively, of such foreign currency forward exchange contracts.

 

Abbott is a party to interest rate hedge contracts totaling approximately $4.0 billion at March 31, 2018 and December 31, 2017 to manage its exposure to changes in the fair value of fixed-rate debt.  These contracts are designated as fair value hedges of the variability of the fair value of fixed-rate debt due to changes in the long-term benchmark interest rates.  The effect of the hedge is to change a fixed-rate interest obligation to a variable rate for that portion of the debt.  Abbott records the contracts at fair value and adjusts the carrying amount of the fixed-rate debt by an offsetting amount.  The amount of hedge ineffectiveness was not significant in 2018 and 2017.

 

15



Table of Contents

 

Abbott Laboratories and Subsidiaries

 

Notes to Condensed Consolidated Financial Statements

 

March 31, 2018

 

(Unaudited)

 

The following table summarizes the amounts and location of certain derivative financial instruments as of March 31, 2018 and December 31, 2017:

 

 

 

Fair Value - Assets

 

Fair Value - Liabilities

 

(in millions)

 

March 31,
2018

 

Dec. 31,
2017

 

Balance Sheet Caption

 

March 31,
2018

 

Dec. 31,
2017

 

Balance Sheet Caption

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest rate swaps designated as fair value hedges

 

$

 

$

 

Deferred income taxes and other assets

 

$

199

 

$

93

 

Post-employment obligations, deferred income taxes and other long-term liabilities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Foreign currency forward exchange contracts:

 

 

 

 

 

 

 

 

 

 

 

 

 

Hedging instruments

 

9

 

21

 

Prepaid expenses and other receivables

 

134

 

106

 

Other accrued liabilities

 

Others not designated as hedges

 

57

 

117

 

Prepaid expenses and other receivables

 

92

 

99

 

Other accrued liabilities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

$

66

 

$

138

 

 

 

$

425

 

$

298

 

 

 

 

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 first three months of 2018 and 2017 and for certain other derivative financial instruments.  The amount of hedge ineffectiveness was not significant in 2018 and 2017 for these hedges.

 

 

 

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

 

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

 

 

 

(in millions)

 

2018

 

2017

 

2018

 

2017

 

Income Statement Caption

 

 

 

 

 

 

 

 

 

 

 

 

 

Foreign currency forward exchange contracts designated as cash flow hedges

 

$

(86

)

$

(91

)

$

(30

)

$

(5

)

Cost of products sold

 

 

 

 

 

 

 

 

 

 

 

 

 

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

 

 

(25

)

 

 

n/a

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest rate swaps designated as fair value hedges

 

n/a

 

n/a

 

(106

)

(26

)

Interest expense

 

 

Losses of $48 million and gains of $9 million were recognized in the first three months of 2018 and 2017, respectively, related to foreign currency forward exchange contracts not designated as hedges. These amounts are reported in the Condensed Consolidated Statement of Earnings on the Net foreign exchange (gain) loss line.

 

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.

 

16



Table of Contents

 

Abbott Laboratories and Subsidiaries

 

Notes to Condensed Consolidated Financial Statements

 

March 31, 2018

 

(Unaudited)

 

The carrying values and fair values of certain financial instruments as of March 31, 2018 and December 31, 2017 are shown in the following table. The carrying values of all other financial instruments approximate their estimated fair values.  The counterparties to financial instruments consist of select major international financial institutions.  Abbott does not expect any losses from nonperformance by these counterparties.

 

 

 

March 31, 2018

 

December 31, 2017

 

(in millions)

 

Carrying
Value

 

Fair
Value

 

Carrying
Value

 

Fair
Value

 

 

 

 

 

 

 

 

 

 

 

Investment Securities:

 

 

 

 

 

 

 

 

 

Equity securities

 

$

830

 

$

830

 

$

797

 

$

797

 

Other

 

83

 

83

 

86

 

86

 

Total Long-term Debt

 

(21,661

)

(22,436

)

(27,718

)

(29,018

)

Foreign Currency Forward Exchange Contracts:

 

 

 

 

 

 

 

 

 

Receivable position

 

66

 

66

 

138

 

138

 

(Payable) position

 

(226

)

(226

)

(205

)

(205

)

Interest Rate Hedge Contracts:

 

 

 

 

 

 

 

 

 

(Payable) position

 

(199

)

(199

)

(93

)

(93

)

 

The fair value of the debt was determined based on significant other observable inputs, including current interest rates.

 

The following table summarizes the bases used to measure certain assets and liabilities at fair value on a recurring basis in the balance sheet:

 

 

 

 

 

Basis of Fair Value Measurement

 

(in millions)

 

Outstanding
Balances

 

Quoted
Prices in
Active
Markets

 

Significant
Other
Observable
Inputs

 

Significant
Unobservable
Inputs

 

March 31, 2018:

 

 

 

 

 

 

 

 

 

Equity securities

 

$

379

 

$

379

 

$

 

$

 

Foreign currency forward exchange contracts

 

66

 

 

66

 

 

Total Assets

 

$

445

 

$

379

 

$

66

 

$

 

 

 

 

 

 

 

 

 

 

 

Fair value of hedged long-term debt

 

$

3,798

 

$

 

$

3,798

 

$

 

Interest rate swap derivative financial instruments

 

199

 

 

199

 

 

Foreign currency forward exchange contracts

 

226

 

 

226

 

 

Contingent consideration related to business combinations

 

119

 

 

 

119

 

Total Liabilities

 

$

4,342

 

$

 

$

4,223

 

$

119

 

 

 

 

 

 

 

 

 

 

 

December 31, 2017:

 

 

 

 

 

 

 

 

 

Equity securities

 

$

374

 

$

374

 

$

 

$

 

Foreign currency forward exchange contracts

 

138

 

 

138

 

 

Total Assets

 

$

512

 

$

374

 

$

138

 

$

 

 

 

 

 

 

 

 

 

 

 

Fair value of hedged long-term debt

 

$

3,898

 

$

 

$

3,898

 

$

 

Interest rate swap derivative financial instruments

 

93

 

 

93

 

 

Foreign currency forward exchange contracts

 

205

 

 

205

 

 

Contingent consideration related to business combinations

 

120

 

 

 

120

 

Total Liabilities

 

$

4,316

 

$

 

$

4,196

 

$

120

 

 

The fair value of debt was determined based on the face value of the debt adjusted for the fair value of the interest rate swaps, which is based on a discounted cash flow analysis. The fair value of foreign currency forward exchange contracts is determined using a market approach, which utilizes values for comparable derivative instruments.  The fair value of the contingent consideration was determined based on an independent appraisal adjusted for the time value of money and other changes in fair value.

 

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Table of Contents

 

Abbott Laboratories and Subsidiaries

 

Notes to Condensed Consolidated Financial Statements

 

March 31, 2018

 

(Unaudited)

 

Note 14 — 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 $10 million.

 

Abbott is involved in various claims and legal proceedings, and Abbott estimates the range of possible loss for its legal proceedings and environmental exposures to be from approximately $90 million to $135 million. The recorded accrual balance at March 31, 2018 for these proceedings and exposures was approximately $110 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.

 

Note 15 — Post-Employment Benefits

 

Retirement plans consist of defined benefit, defined contribution, and medical and dental plans.  Net cost recognized in continuing operations for the three months ended March 31 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

 

(in millions)

 

March 31,
2018

 

March 31,
2017

 

March 31,
2018

 

March 31,
2017

 

 

 

 

 

 

 

 

 

 

 

Service cost - benefits earned during the period

 

$

78

 

$

72

 

$

7

 

$

7

 

Interest cost on projected benefit obligations

 

78

 

72

 

12

 

11

 

Expected return on plan assets

 

(171

)

(152

)

(8

)

(8

)

Net amortization of:

 

 

 

 

 

 

 

 

 

Actuarial loss, net

 

54

 

42

 

8

 

6

 

Prior service cost (credit)

 

 

 

(11

)

(11

)

Net cost — continuing operations

 

$

39

 

$

34

 

$

8

 

$

5

 

 

In the first quarter of 2018, Abbott adopted ASU 2017-07 which requires all components of pension and other postretirement benefit expense except service cost to be presented outside any subtotal of income from operations. These amounts are now classified as non-operating (income) loss. Abbott’s Condensed Consolidated Statement of Earnings was retrospectively adjusted, resulting in the reclassification of $40 million of income from the Operating earnings (loss) line to the Other (income) expense, net line in the first quarter of 2017.

 

In the first quarter of 2017, Abbott recognized a $10 million curtailment gain related to the disposition of AMO.

 

Abbott funds its domestic defined benefit plans according to IRS funding limitations.  International pension plans are funded according to similar regulations.  In the first quarters of 2018 and 2017, $14 million and $283 million, respectively, were contributed to defined benefit plans and $11 million in both years were contributed to the post-employment medical and dental benefit plans.

 

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Table of Contents

 

Abbott Laboratories and Subsidiaries

 

Notes to Condensed Consolidated Financial Statements

 

March 31, 2018

 

(Unaudited)

 

Note 16 — Taxes on Earnings

 

Taxes on earnings from continuing operations reflect the estimated annual effective rates and include charges for interest and penalties. In the first quarter of 2018, taxes on earnings from continuing operations include approximately $65 million in excess tax benefits associated with share-based compensation. Earnings from discontinued operations, net of tax, in the first quarter of 2018 reflect the recognition of $9 million of net tax benefits primarily as a result of the resolution of various tax positions related to prior years which decreased the gross amount of unrecognized tax benefits by $16 million. In the first quarter of 2017, taxes on earnings from continuing operations include $430 million of tax expense related to the gain on the sale of the AMO business, which was taxed at a discrete tax rate.  Earnings from discontinued operations, net of tax, in the first quarter of 2017 reflected the recognition of $33 million of net tax benefits primarily as a result of the resolution of various tax positions related to prior years which decreased the gross amount of unrecognized tax benefits by $33 million.

 

Tax authorities in various jurisdictions regularly review Abbott’s income tax filings.  Abbott believes that it is reasonably possible that the recorded amount of gross unrecognized tax benefits may decrease by $150 million to $300 million, including cash adjustments, within the next twelve months as a result of concluding various domestic and international tax matters. In the U.S., Abbott’s federal income tax returns through 2013 are settled except for the federal income tax returns of the former Alere consolidated group which are settled through 2012.

 

The Tax Cuts and Jobs Act (“TCJA”) was enacted in the U.S. on December 22, 2017. The TCJA reduces the U.S. federal corporate tax rate from 35% to 21%, requires companies to pay a one-time transition tax on earnings of certain foreign subsidiaries that were previously tax deferred and creates new taxes on certain foreign sourced earnings.

 

In the fourth quarter of 2017, Abbott recorded an estimate of net tax expense of $1.46 billion for the impact of the TCJA, which was included in Taxes on Earnings from Continuing Operations in the Consolidated Statement of Earnings. The estimate was provisional and included a charge of approximately $2.89 billion for the transition tax, partially offset by a net benefit of approximately $1.42 billion for the remeasurement of deferred tax assets and liabilities and a net benefit of approximately $10 million related to certain other impacts of the TCJA.

 

In the first quarter of 2018, Abbott recorded a $15 million adjustment to the provisional transition tax liability for associated effects related to state tax. This adjustment increases the estimate of net tax expense for the impact of TCJA to $1.475 billion.

 

Given the significant complexity of the TCJA, Abbott will continue to evaluate and analyze the impact of this legislation. The $1.475 billion estimate is provisional and is based on Abbott’s latest analysis of the TCJA and may be materially adjusted in future periods due to among other things, additional analysis performed by Abbott and additional guidance that may be issued by the U.S. Department of Treasury, the Securities and Exchange Commission, or the Financial Accounting Standards Board.

 

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Table of Contents

 

Abbott Laboratories and Subsidiaries

 

Notes to Condensed Consolidated Financial Statements

 

March 31, 2018

 

(Unaudited)

 

Note 17 — 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:

 

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, Rapid Diagnostics, Molecular Diagnostics and Point of Care Diagnostics divisions are aggregated and reported as the Diagnostic Products segment.

 

Cardiovascular and Neuromodulation Products — Worldwide sales of cardiac rhythm management, electrophysiology, heart failure, vascular, structural heart and neuromodulation products. For segment reporting purposes, the Cardiac Arrhythmias & Heart Failure, Vascular, Neuromodulation and Structural Heart divisions are aggregated and reported as the Cardiovascular and Neuromodulation segment.

 

Non-reportable segments include AMO through the date of sale and Diabetes Care.

 

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.  In addition, intangible asset amortization is not allocated to operating segments, and intangible assets and goodwill are not included in the measure of each segment’s assets. The following segment information has been prepared in accordance with the internal accounting policies of Abbott, as described above, and is not presented in accordance with generally accepted accounting principles applied to the consolidated financial statements.

 

 

 

Three Months Ended March 31

 

 

 

Net Sales to
External Customers

 

Operating
Earnings

 

(in millions)

 

2018

 

2017

 

2018

 

2017

 

Established Pharmaceutical Products

 

$

1,044

 

$

950

 

$

167

 

$

140

 

Nutritional Products

 

1,756

 

1,642

 

365

 

351

 

Diagnostic Products

 

1,837

 

1,158

 

443

 

284

 

Cardiovascular and Neuromodulation Products

 

2,323

 

2,103

 

724

 

619

 

Total Reportable Segments

 

6,960

 

5,853

 

1,699

 

1,394

 

Other

 

430

 

482

 

 

 

 

 

Net Sales

 

$

7,390

 

$

6,335

 

 

 

 

 

Corporate functions and benefit plans costs

 

 

 

 

 

(152

)

(93

)

Non-reportable segments

 

 

 

 

 

92

 

46

 

Net interest expense

 

 

 

 

 

(199

)

(204

)

Share-based compensation (a)

 

 

 

 

 

(212

)

(171

)

Amortization of intangible assets

 

 

 

 

 

(584

)

(522

)

Other, net (b)

 

 

 

 

 

(213

)

286

 

Earnings from continuing operations before taxes

 

 

 

 

 

$

431

 

$

736

 

 


(a)         Approximately 50 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 in 2018 includes inventory step-up amortization, restructuring charges and integration costs associated with the acquisitions of St. Jude Medical and Alere. Other, net in 2017 includes the gain on the sale of the AMO business, partially offset by inventory step-up amortization, restructuring charges and integration costs associated with the acquisition of St. Jude Medical.

 

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Table of Contents

 

Item 2.  Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

Financial Review - Results of Operations

 

Abbott’s revenues are derived primarily from the sale of a broad line of health care products under short-term receivable arrangements. Patent protection and licenses, technological and performance features, and inclusion of Abbott’s products under a contract most impact which products are sold; price controls, competition and rebates most impact the net selling prices of products; and foreign currency translation impacts the measurement of net sales and costs. Abbott’s primary products are nutritional products, branded generic pharmaceuticals, diagnostic testing products and cardiovascular and neuromodulation products.

 

The following table details sales by reportable segment for the three months ended March 31.  Percent changes are versus the prior year and are based on unrounded numbers.

 

 

 

Net Sales to External Customers

 

(in millions)

 

March 31,
2018

 

March 31,
2017

 

Total
Change

 

Impact of
Foreign
Exchange

 

Total Change
Excl. Foreign
Exchange

 

 

 

 

 

 

 

 

 

 

 

 

 

Established Pharmaceutical Products

 

$

1,044

 

$

950

 

9.9

%

3.1

%

6.8

%

Nutritional Products

 

1,756

 

1,642

 

7.0

 

2.3

 

4.7

 

Diagnostic Products

 

1,837

 

1,158

 

58.7

 

4.9

 

53.8

 

Cardiovascular and Neuromodulation Products

 

2,323

 

2,103

 

10.5

 

4.9

 

5.6

 

Total Reportable Segments

 

6,960

 

5,853

 

18.9

 

3.8

 

15.1

 

Other

 

430

 

482

 

(11.0

)

7.1

 

(18.1

)

Net Sales from Continuing Operations

 

$

7,390

 

$

6,335

 

16.7

 

4.1

 

12.6

 

 

 

 

 

 

 

 

 

 

 

 

 

Total U.S.

 

$

2,675

 

$

2,324

 

15.1

 

 

15.1

 

 

 

 

 

 

 

 

 

 

 

 

 

Total International

 

$

4,715

 

$

4,011

 

17.6

 

6.5

 

11.1

 

 

Note: In order to compute results excluding the impact of exchange rates, current year U.S. dollar sales are multiplied or divided, as appropriate, by the current year average foreign exchange rates and then those amounts are multiplied or divided, as appropriate, by the prior year average foreign exchange rates.

 

Net sales growth in 2018 was driven by the acquisition of Alere which closed in the fourth quarter of 2017, as well as growth in all of Abbott’s other businesses, excluding the impact of foreign exchange. The decrease in the Other category reflects the sale of the Abbott Medical Optics (AMO) business to Johnson & Johnson, partially offset by growth in Abbott’s Diabetes Care business. The AMO business was included in Abbott’s results as a non-reportable segment through February 27, 2017, the date of the divestiture. Double-digit growth in Diabetes Care was led by FreeStyle Libre, Abbott’s sensor-based continuous glucose monitoring (CGM) system, which removes the need for routine fingersticks for people with diabetes.

 

Excluding the impact of the Alere acquisition, the divestitures of AMO and the legacy St. Jude Medical vascular closure business, and the impact of foreign exchange, total net sales increased 6.9 percent. Sales related to these divestitures totaled $187 million in the first quarter of 2017. Abbott’s net sales were also positively impacted by changes in foreign currency exchange rates during the period. The relatively weaker U.S. dollar increased total international sales by 6.5 percent and total sales by 4.1 percent.

 

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Table of Contents

 

The table below provides detail by sales category for the three months ended March 31.  Percent changes are versus the prior year and are based on unrounded numbers.

 

(in millions)

 

March 31,
2018

 

March 31,
2017

 

Total
Change

 

Impact of
Foreign
Exchange

 

Total Change
Excl. Foreign
Exchange

 

Established Pharmaceutical Products —

 

 

 

 

 

 

 

 

 

 

 

Key Emerging Markets

 

$

793

 

$

730

 

8.7

%

1.9

%

6.8

%

Other Emerging Markets

 

251

 

220

 

13.9

 

7.3

 

6.6

 

 

 

 

 

 

 

 

 

 

 

 

 

Nutritionals —

 

 

 

 

 

 

 

 

 

 

 

International Pediatric Nutritionals

 

546

 

495

 

10.5

 

4.2

 

6.3

 

U.S. Pediatric Nutritionals

 

448

 

432

 

3.7

 

 

3.7

 

International Adult Nutritionals

 

452

 

417

 

8.4

 

4.0

 

4.4

 

U.S. Adult Nutritionals

 

310

 

298

 

4.0

 

 

4.0

 

 

 

 

 

 

 

 

 

 

 

 

 

Diagnostics —

 

 

 

 

 

 

 

 

 

 

 

Core Laboratory

 

1,019

 

911

 

11.9

 

5.6

 

6.3

 

Molecular

 

118

 

112

 

5.0

 

3.7

 

1.3

 

Point of Care

 

141

 

135

 

4.8

 

0.8

 

4.0

 

Rapid Diagnostics

 

559

 

 

n/m

 

n/m

 

n/m

 

 

 

 

 

 

 

 

 

 

 

 

 

Cardiovascular and Neuromodulation —

 

 

 

 

 

 

 

 

 

 

 

Rhythm Management

 

535

 

511

 

4.7

 

4.7

 

 

Electrophysiology

 

391

 

316

 

23.8

 

5.2

 

18.6

 

Heart Failure

 

153

 

142

 

7.3

 

2.5

 

4.8

 

Vascular

 

739

 

703

 

5.2

 

5.3

 

(0.1

)

Structural Heart

 

293

 

256

 

14.5

 

7.0

 

7.5

 

Neuromodulation

 

212

 

175

 

21.3

 

2.5

 

18.8

 

 

Key Emerging Markets for the Established Pharmaceutical Products business include India, Russia, Brazil and China, along with several other markets that represent the most attractive long-term growth opportunities for Abbott’s branded generics product portfolio.  Excluding the unfavorable effect of foreign exchange, sales in the Key Emerging Markets increased 6.8 percent compared to the first quarter of 2017 due to double-digit growth across several geographies including India, China and Brazil.

 

Excluding the effect of foreign exchange, the 6.3 percent increase in International Pediatric Nutritional sales was primarily driven by strong growth across several countries in Asia, including Greater China. In the U.S., the 3.7 percent increase in Pediatric Nutritional sales reflects market share gains in the infant nutrition category. Excluding the effect of foreign exchange, the 4.4 percent increase in International Adult Nutritional sales reflects continued strong growth of Ensure® and Glucerna® in Latin America and various other markets. In the U.S., the 4.0 percent increase in Adult Nutritional sales was driven by the growth of Ensure® in the retail and institutional market segments.

 

Excluding the effect of foreign exchange, the 53.8 percent increase in Diagnostics sales was primarily driven by Alere which was acquired in the fourth quarter of 2017. Excluding the impact of the acquisition, as well as the impact of foreign exchange, sales in Diagnostics increased 5.5 percent driven by above-market growth and share gains in Core Laboratory in the U.S. and internationally, as well as growth in Point of Care’s international sales.

 

Excluding the effect of foreign exchange, the 5.6 percent increase in the Cardiovascular and Neuromodulation Products segment was driven by double-digit growth in Electrophysiology and Neuromodulation. The growth in Electrophysiology reflects share gains from the recent U.S. launch of Abbott’s Confirm RxTM Insertable Cardiac Monitor (ICM), the world’s first and only smartphone-compatible ICM designed to help physicians remotely identify cardiac arrhythmias. The growth in Neuromodulation was led by recently launched products for the treatment of chronic pain and movement disorders. Growth in Structural Heart was driven by MitraClip®, Abbott’s market-leading device for the minimally-invasive treatment of mitral regurgitation.  In March, Abbott announced MitraClip was granted national reimbursement in Japan, which enables greater access for patients to this therapy. In Heart Failure, sales growth was led by market uptake of Abbott’s HeartMate 3 system. In Vascular, higher international drug eluting stent (DES) sales and growth in vessel closure and other revenues offset lower U.S. DES sales due to lower market share.  In Rhythm Management, market share gains in the new patient segment were offset by replacement cycle dynamics.

 

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Table of Contents

 

The gross profit margin percentage was 50.6 percent for the first quarter 2018 compared to 43.4 percent for the first quarter 2017.  The increase primarily reflects the favorable comparison versus the prior year which included inventory step-up amortization related to the St. Jude Medical acquisition. The increase also reflects margin improvement in various businesses including Diabetes Care and Cardiovascular and Neuromodulation.

 

Research and development expenses increased by $36 million, or 6.4 percent, in the first quarter of 2018 due primarily to the addition of the acquired Alere business as well as higher spending in other areas including Cardiovascular and Neuromodulation. For the three months ended March 31, 2018, research and development expenditures totaled $246 million for the Cardiovascular and Neuromodulation Products segment, $147 million for the Diagnostic Products segment, $44 million for the Established Pharmaceutical Products segment and $48 million for the Nutritional Products segment.

 

Selling, general and administrative expenses for the first quarter of 2018 increased 4.2 percent due primarily to the addition of the acquired Alere business as well as higher spending to drive continued growth and market expansion in various businesses, partially offset by lower acquisition-related expenses.

 

In the first quarter of 2018, Abbott retrospectively adopted Accounting Standards Update (ASU) 2017-07, Compensation — Retirement Benefits (Topic 715): Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost which changes the financial statement presentation requirements for pension and other postretirement benefit expense.  While service cost continues to be reported in the same financial statement line items as other current employee compensation costs, the ASU requires all other components of pension and other postretirement benefit cost to be presented separately from service cost, and outside any subtotal of income from operations. As a result of the new accounting standard, approximately $40 million of pension and other post retirement related income is now being reported in Other (income) expense, net in the first quarter of 2018 and 2017.

 

Business Acquisitions

 

On January 4, 2017, Abbott completed the acquisition of St. Jude Medical, a global medical device manufacturer, for approximately $23.6 billion, including approximately $13.6 billion in cash and approximately $10 billion in Abbott common shares, which represented approximately 254 million shares of Abbott common stock, based on Abbott’s closing stock price on the acquisition date. As part of the acquisition, approximately $5.9 billion of St. Jude Medical’s debt was assumed, repaid or refinanced by Abbott.  The acquisition provides expanded opportunities for future growth and is an important part of the company’s ongoing effort to develop a strong, diverse portfolio of devices, diagnostics, nutritionals and branded generic pharmaceuticals.  The combined business competes in nearly every area of the cardiovascular device market, as well as in the neuromodulation market.

 

Under the terms of the agreement, for each St. Jude Medical common share, St. Jude Medical shareholders received $46.75 in cash and 0.8708 of an Abbott common share.  At an Abbott stock price of $39.36, which reflects the closing price on January 4, 2017, this represented a value of approximately $81 per St. Jude Medical common share and total purchase consideration of $23.6 billion.  The cash portion of the acquisition was funded through a combination of medium and long-term debt issued in November 2016 and a $2.0 billion 120-day senior unsecured bridge term loan facility which was subsequently repaid.

 

In 2016, Abbott and St. Jude Medical agreed to sell certain businesses to Terumo Corporation (Terumo) for approximately $1.12 billion.  The sale included the St. Jude Medical Angio-Seal™ and Femoseal™ vascular closure and Abbott’s Vado® Steerable Sheath businesses. The sale closed on January 20, 2017 and no gain or loss was recorded in the Condensed Consolidated Statement of Earnings.

 

On October 3, 2017, Abbott acquired Alere Inc. (Alere), a diagnostic device and service provider, for $51.00 per common share in cash, which equated to a purchase price of approximately $4.5 billion.  As part of the acquisition, Abbott tendered for Alere’s preferred shares for a total value of approximately $0.7 billion.  In addition, approximately $3.0 billion of Alere’s debt was assumed and subsequently repaid.  The acquisition establishes Abbott as a leader in point of care testing, expands Abbott’s global diagnostics presence and provides access to new products, channels and geographies. Abbott utilized a combination of cash on hand and debt to fund the acquisition.

 

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Table of Contents

 

The preliminary allocation of the fair value of the Alere acquisition is shown in the table below. The allocation of the fair value of the acquisition will be finalized when the valuation is completed and differences between the preliminary and final allocation could be material.

 

(in billions)

 

 

 

Acquired intangible assets, non-deductible

 

$

3.5

 

Goodwill, non-deductible

 

4.1

 

Acquired net tangible assets

 

0.9

 

Deferred income taxes recorded at acquisition

 

(0.7

)

Net debt

 

(2.6

)

Preferred stock

 

(0.7

)

Total preliminary allocation of fair value

 

$

4.5

 

 

The goodwill is primarily attributable to expected synergies from combining operations, as well as intangible assets that do not qualify for separate recognition. The goodwill is identifiable to the Diagnostic Products reportable segment. The acquired tangible assets consist primarily of trade accounts receivable of approximately $430 million, inventory of approximately $425 million, other current assets of $206 million, property and equipment of approximately $540 million, and other long-term assets of $112 million. The acquired tangible liabilities consist of trade accounts payable and other current liabilities of approximately $625 million and other non-current liabilities of approximately $160 million.

 

In the third quarter of 2017, Alere entered into agreements to sell its Triage MeterPro cardiovascular and toxicology business and the assets and liabilities related to its B-type Natriuretic Peptide assay business run on Beckman Coulter analyzers to Quidel Corporation (Quidel).  The transactions with Quidel reflect a total purchase price of $400 million payable at the close of the transaction, $240 million payable in six annual installments beginning approximately six months after the close of the transaction, and contingent consideration with a maximum value of $40 million. In the third quarter of 2017, Alere entered into an agreement with Siemens Diagnostics Holding II B.V. (Siemens) to sell its subsidiary, Epocal Inc., for approximately $200 million payable at the close of the transaction. Alere agreed to divest these businesses in connection with the review by the Federal Trade Commission and the European Commission of Abbott’s agreement to acquire Alere. The sale to Quidel closed on October 6, 2017, and the sale to Siemens closed on October 31, 2017. No gain or loss on these sales was recorded in the Consolidated Statement of Earnings.

 

On July 17, 2017, Abbott commenced a tender offer to purchase for cash the 1.77 million outstanding shares of Alere’s Series B Convertible Perpetual Preferred Stock at a price of $402 per share, plus accrued but unpaid dividends to, but not including, the settlement date of the tender offer. This tender offer was subject to the satisfaction of certain conditions, including Abbott’s acquisition of Alere and upon there being validly tendered (and not properly withdrawn) at the expiration date of the tender offer that number of shares of Preferred Stock that equaled at least a majority of the Preferred Stock issued and outstanding at the expiration of the tender offer.  The tender offer expired on October 3, 2017.  All conditions to the offer were satisfied and Abbott accepted for payment the 1.748 million shares of Preferred Stock that were validly tendered (and not properly withdrawn).  The remaining shares were cashed out for an amount equal to the $400.00 per share liquidation preference of such shares, plus accrued but unpaid dividends, without interest.  Payment for all of the shares of Preferred Stock was made in the fourth quarter of 2017.

 

Restructuring Plans

 

The results for the first three months of 2018 reflect charges under approved restructuring plans as part of the integration of the acquisition of St. Jude Medical and Alere, as well as costs related to other actions associated with the company’s plans to streamline various operations. Abbott recorded employee related severance and other charges of approximately $33 million in the first three months of 2018 related to these initiatives. Approximately $10 million is recorded in Cost of products sold, approximately $8 million is recognized in Research and development and approximately $15 million is recognized in Selling, general and administrative expense.  See Note 10 to the financial statements, “Restructuring Plans,” for additional information regarding these charges.

 

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Other (Income) Expense, net

 

Other (income) expense, net decreased by $1.1 billion in the first quarter of 2018 compared to 2017 due to a pre-tax gain of $1.151 billion recorded in the first quarter of 2017 from Abbott’s completion of the sale of AMO to Johnson & Johnson.

 

Interest Expense (Income), net

 

Interest expense (income), net decreased $5 million in the first quarter of 2018 compared to 2017 due to higher interest income in the first quarter of 2018 as a result of higher rates of return on cash and cash equivalents and short-term investments.

 

Taxes on Earnings from Continuing Operations

 

Taxes on earnings from continuing operations reflect the estimated annual effective rates and include charges for interest and penalties. In the first quarter of 2018, taxes on earnings from continuing operations include approximately $65 million in excess tax benefits associated with share-based compensation. Earnings from discontinued operations, net of tax, in the first quarter of 2018 reflect the recognition of $9 million of net tax benefits primarily as a result of the resolution of various tax positions related to prior years which decreased the gross amount of unrecognized tax benefits by $16 million.  In the first quarter of 2017, taxes on earnings from continuing operations include $430 million of tax expense related to the gain on the sale of the AMO business, which was taxed at a discrete tax rate.  Earnings from discontinued operations, net of tax, in the first quarter of 2017 reflected the recognition of $33 million of net tax benefits primarily as a result of the resolution of various tax positions related to prior years which decreased the gross amount of unrecognized tax benefits by $33 million.

 

Tax authorities in various jurisdictions regularly review Abbott’s income tax filings.  Abbott believes that it is reasonably possible that the recorded amount of gross unrecognized tax benefits may decrease by $150 million to $300 million, including cash adjustments, within the next twelve months as a result of concluding various domestic and international tax matters. In the U.S., Abbott’s federal income tax returns through 2013 are settled except for the federal income tax returns of the former Alere consolidated group which are settled through 2012.

 

The Tax Cuts and Jobs Act (“TCJA”) was enacted in the U.S. on December 22, 2017. The TCJA reduces the U.S. federal corporate tax rate from 35% to 21%, requires companies to pay a one-time transition tax on earnings of certain foreign subsidiaries that were previously tax deferred and creates new taxes on certain foreign sourced earnings.

 

In the fourth quarter of 2017, Abbott recorded an estimate of net tax expense of $1.46 billion for the impact of the TCJA, which was included in Taxes on Earnings from Continuing Operations in the Consolidated Statement of Earnings. The estimate was provisional and included a charge of approximately $2.89 billion for the transition tax, partially offset by a net benefit of approximately $1.42 billion for the remeasurement of deferred tax assets and liabilities and a net benefit of approximately $10 million related to certain other impacts of the TCJA.

 

In the first quarter of 2018, Abbott recorded a $15 million adjustment to the provisional transition tax liability for associated effects related to state tax. This adjustment increases the estimate of net tax expense for the impact of TCJA to $1.475 billion.

 

Given the significant complexity of the TCJA, Abbott will continue to evaluate and analyze the impact of this legislation. The $1.475 billion estimate is provisional and is based on Abbott’s latest analysis of the TCJA and may be materially adjusted in future periods due to among other things, additional analysis performed by Abbott and additional guidance that may be issued by the U.S. Department of Treasury, the Securities and Exchange Commission, or the Financial Accounting Standards Board.

 

Discontinued Operations

 

On January 1, 2013, Abbott completed the separation of AbbVie Inc. (AbbVie), which was formed to hold Abbott’s research-based proprietary pharmaceuticals business.  Abbott has retained all liabilities for all U.S. federal and foreign income taxes on income prior to the separation, as well as certain non-income related taxes attributable to AbbVie’s business prior to the separation. AbbVie generally will be liable for all other taxes attributable to its business.

 

Earnings from discontinued operations reflect the recognition of a net tax benefit of $9 million and $33 million in the first quarter of 2018 and 2017, respectively, as a result of the resolution of various tax positions primarily related to AbbVie’s operations for years prior to the separation.

 

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Assets Held for Disposition

 

As discussed in Note 8 - Business Acquisitions, in conjunction with the acquisition of Alere Inc. (Alere), Abbott sold the Triage MeterPro cardiovascular and toxicology business and the assets and liabilities related to its B-type Natriuretic Peptide assay business run on Beckman Coulter analyzers to Quidel Corporation (Quidel).  The legal transfer of certain assets and liabilities related to these businesses did not occur at the close of the sale to Quidel due to, among other factors, the time required to transfer marketing authorizations and other regulatory requirements in various countries.  Under the terms of the sale agreement with Abbott, Quidel is subject to the risks and entitled to the benefits generated by these operations and assets.  The assets presented as held for disposition in the Condensed Consolidated Balance Sheet as of March 31, 2018 and December 31, 2017, primarily relate to the businesses sold to Quidel.

 

(in millions)

 

March 31,
2018

 

December 31,
2017

 

Trade receivables, net

 

$

15

 

$

12

 

Total inventories

 

5

 

8

 

Current assets held for disposition

 

20

 

20

 

Net property and equipment

 

 

56

 

Intangible assets, net of amortization

 

18

 

18

 

Goodwill

 

102

 

102

 

Non-current assets held for disposition

 

120

 

176

 

Total assets held for disposition

 

$

140

 

$

196

 

 

Liquidity and Capital Resources March 31, 2018 Compared with December 31, 2017

 

The reduction of cash and cash equivalents from $9.4 billion at December 31, 2017 to $3.9 billion at March 31, 2018 primarily reflects repayment of debt and the payment of dividends, partially offset by cash generated from operations in the quarter. Working capital was $6.0 billion at March 31, 2018 and $11.2 billion at December 31, 2017.  The $5.2 billion decrease in working capital in 2018 is primarily due to the reduction in Cash and cash equivalents as discussed above.

 

Net cash from operating activities for the first three months of 2018 totaled $1.108 billion, an increase of $534 million over the prior year due primarily to higher segment operating earnings, continued improvements in working capital management, timing of pension contributions and lower acquisition-related expenses. Other, net in Net cash from operating activities for the first three months of 2018 was a use of $182 million and includes the impact of approximately $220 million of cash taxes paid.  Other, net in Net cash from operating activities for the first three months of 2017 of $101 million includes the impact of approximately $430 million of tax associated with the disposition of businesses, partially offset by approximately $160 million of cash taxes paid.  Other net, in 2017 also includes contributions to defined benefit pension plans of $283 million. Abbott expects to fund cash dividends, capital expenditures and its other investments in its businesses with cash flow from operating activities, cash on hand, short-term investments and borrowings.

 

In March 2017, Abbott sold 44 million of the Mylan N.V. ordinary shares received upon the sale of its developed markets branded generics pharmaceuticals business to Mylan Inc.  Abbott received $1.685 billion in proceeds from the sale of these shares.

 

On January 5, 2018, Abbott paid off its $2.8 billion 5-year term loan and the remaining $1.150 billion balance under its revolving credit agreement. On February 16, 2018, the board of directors authorized the redemption of up to $5 billion of currently outstanding long-term notes in addition to the $3.95 billion repaid in January 2018. On March 22, 2018, Abbott redeemed all of the $947 million principal amount of its 5.125% Notes due 2019, as well as $1.055 billion of the $2.850 billion principal amount of its 2.35% Notes due 2019. Abbott incurred a net charge of $14 million related to the early repayment of this debt.

 

At March 31, 2018, Abbott’s long-term debt rating was BBB by Standard & Poor’s Corporation and Baa2 by Moody’s Investors Service. Abbott expects to maintain an investment grade rating. Abbott has readily available financial resources, including lines of credit of $5.0 billion which expire in 2019.

 

In September 2014, the board of directors authorized the repurchase of up to $3.0 billion of Abbott’s common shares from time to time. The 2014 authorization was in addition to the $512 million unused portion of a previous program announced in June 2013. In the first three months of 2016, Abbott repurchased 10.4 million shares at a cost of $408 million under the program authorized in 2014. On April 27, 2016, the board of directors authorized the issuance and sale for general corporate purposes of up to 75 million common shares that would result in proceeds of up to $3 billion. No shares have been issued under this authorization.

 

In the first quarter of 2018, Abbott declared a dividend of $0.28 per share on its common shares, which represents an increase of approximately 6% over the $0.265 per share dividend declared in the first quarter of 2017.

 

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Recently Issued Accounting Standards Not Yet Adopted

 

In February 2018, the Financial Accounting Standards Board (FASB) issued ASU 2018-02, Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income, which allows companies to reclassify stranded tax effects resulting from the 2017 Tax Cuts and Jobs Act, from accumulated other comprehensive income to retained earnings. The standard becomes effective for Abbott beginning in the first quarter of 2019 and early adoption is permitted. Abbott is currently evaluating the impact the new guidance will have on its consolidated financial statements.

 

In August 2017, the FASB issued ASU 2017-12, Targeted Improvements to Accounting for Hedging Activities, which makes changes to the designation and measurement guidance for qualifying hedging relationships and the presentation of hedge results.  The standard becomes effective for Abbott beginning in the first quarter of 2019 and early adoption is permitted. Abbott is currently evaluating the effect that the new guidance will have on its consolidated financial statements.

 

In February 2016, the FASB issued ASU 2016-02, Leases, which requires lessees to recognize assets and liabilities for most leases on the balance sheet. The standard becomes effective for Abbott beginning in the first quarter of 2019 and early adoption is permitted. Adoption requires application of the new guidance for all periods presented. Abbott is currently evaluating the impact the new guidance will have on its consolidated financial statements.

 

Revenue Recognition Standard

 

In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers, which provides a single comprehensive model for accounting for revenue from contracts with customers and supersedes nearly all previously existing revenue recognition guidance. The core principle of the ASU is that an entity should recognize revenue when it transfers promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. Abbott adopted the new standard as of January 1, 2018, using the modified retrospective approach method. Under this method, entities recognize the cumulative effect of applying the new standard at the date of initial application with no restatement of comparative periods presented. The cumulative effect of applying the new standard resulted in an increase to Earnings employed in the business in the Condensed Consolidated Balance Sheet of $23 million which was recorded at January 1, 2018. The impact of adopting ASU 2014-09 was not significant to individual financial statement line items on the Condensed Consolidated Balance Sheet and Condensed Consolidated Statement of Earnings.

 

See Note 2 to the financial statements, “New Accounting Standards,” for additional information regarding recently issued accounting standards.

 

Legislative Issues

 

Abbott’s primary markets are highly competitive and subject to substantial government regulations throughout the world.  Abbott expects debate to continue over the availability, method of delivery, and payment for health care products and services.  It is not possible to predict the extent to which Abbott or the health care industry in general might be adversely affected by these factors in the future.  A more complete discussion of these factors is contained in Item 1, Business, and Item 1A, Risk Factors, in the 2017 Annual Report on Form 10-K.

 

Private Securities Litigation Reform Act of 1995 — A Caution Concerning Forward-Looking Statements

 

Under the safe harbor provisions of the Private Securities Litigation Reform Act of 1995, Abbott cautions investors that any forward-looking statements or projections made by Abbott, including those made in this document, are subject to risks and uncertainties that may cause actual results to differ materially from those projected. Economic, competitive, governmental, technological and other factors that may affect Abbott’s operations are discussed in Item 1A, Risk Factors, in the 2017 Annual Report on Form 10-K.

 

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PART I.         FINANCIAL INFORMATION

 

Item 4.           Controls and Procedures

 

(a)         Evaluation of disclosure controls and procedures.  The Chief Executive Officer, Miles D. White, and Chief Financial Officer, Brian B. Yoor, evaluated the effectiveness of Abbott Laboratories’ disclosure controls and procedures as of the end of the period covered by this report, and concluded that Abbott Laboratories’ disclosure controls and procedures were effective to ensure that information Abbott is required to disclose in the reports that it files or submits with the Securities and Exchange Commission (the “Commission”) under the Securities Exchange Act of 1934 (the “Exchange Act”) is recorded, processed, summarized and reported, within the time periods specified in the Commission’s rules and forms, and to ensure that information required to be disclosed by Abbott in the reports that it files or submits under the Exchange Act is accumulated and communicated to Abbott’s management, including its principal executive officer and principal financial officer, as appropriate to allow timely decisions regarding required disclosure.

 

(b)         Changes in internal control over financial reporting.  During the quarter ended March 31, 2018, there were no changes in Abbott’s internal control over financial reporting (as defined in Rule 13a-15(f) under the Exchange Act) that have materially affected, or are reasonably likely to materially affect, Abbott’s internal control over financial reporting.

 

PART II.        OTHER INFORMATION

 

Item 1.           Legal Proceedings

 

Abbott is involved in various claims, legal proceedings and investigations, including those described in our Annual Report on Form 10-K for the year ended December 31, 2017.

 

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Item 2.           Unregistered Sales of Equity Securities and Use of Proceeds

 

(c)  Issuer Purchases of Equity Securities

 

Period

 

(a) Total
Number of
Shares (or
Units)
Purchased

 

(b) Average
Price Paid per
Share (or
Unit)

 

(c) Total Number
of Shares (or
Units) Purchased
as Part of
Publicly
Announced Plans
or Programs

 

(d) Maximum
Number (or
Approximate
Dollar Value) of
Shares (or Units)
that May Yet Be
Purchased Under
the Plans or
Programs

 

January 1, 2018 – January 31, 2018