XNYS:ABT Abbott Laboratories Quarterly Report 10-Q Filing - 3/31/2012

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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, 2012

 

OR

 

o

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

 

For the transition period from                     to                     

 

Commission File No. 1-2189

 

ABBOTT LABORATORIES

 

An Illinois Corporation

 

 

 

I.R.S. Employer Identification No.

 

 

 

 

36-0698440

 

100 Abbott Park Road

Abbott Park, Illinois 60064-6400

 

Telephone:  (847) 937-6l00

 

Indicate by check mark whether the registrant: (l) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of l934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes x  No o

 

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

 

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

 

Large Accelerated Filer x

 

Accelerated Filer o

 

 

 

Non-Accelerated Filer o

 

Smaller reporting company o

(Do not check if a smaller reporting company)

 

 

 

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

 

As of March 31, 2012, Abbott Laboratories had 1,573,391,467 common shares without par value outstanding.

 

 

 



 

PART  I.  FINANCIAL INFORMATION

 

Abbott Laboratories and Subsidiaries

 

Condensed Consolidated Financial Statements

 

(Unaudited)

 



 

Abbott Laboratories and Subsidiaries

 

Condensed Consolidated Statement of Earnings

 

(Unaudited)

 

(dollars and shares in thousands except per share data)

 

 

 

Three Months Ended March 31

 

 

 

2012

 

2011

 

Net Sales

 

$

9,456,633

 

$

9,040,850

 

 

 

 

 

 

 

Cost of products sold

 

3,724,921

 

3,858,983

 

Research and development

 

1,005,682

 

930,400

 

Acquired in-process and collaborations research and development

 

150,000

 

100,000

 

Selling, general and administrative

 

3,000,308

 

2,850,318

 

Total Operating Cost and Expenses

 

7,880,911

 

7,739,701

 

 

 

 

 

 

 

Operating Earnings

 

1,575,722

 

1,301,149

 

 

 

 

 

 

 

Interest expense

 

126,866

 

145,587

 

Interest (income)

 

(17,437

)

(21,716

)

Net foreign exchange loss (gain)

 

24,762

 

(32,366

)

Other (income) expense, net

 

(71,498

)

140,858

 

Earnings Before Taxes

 

1,513,029

 

1,068,786

 

Taxes on Earnings

 

270,905

 

204,968

 

Net Earnings

 

$

1,242,124

 

$

863,818

 

 

 

 

 

 

 

Basic Earnings Per Common Share

 

$

0.79

 

$

0.56

 

Diluted Earnings Per Common Share

 

$

0.78

 

$

0.55

 

 

 

 

 

 

 

Cash Dividends Declared Per Common Share

 

$

0.51

 

$

0.48

 

 

 

 

 

 

 

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

 

1,573,921

 

1,551,755

 

Dilutive Common Stock Options and Awards

 

15,589

 

6,886

 

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

 

1,589,510

 

1,558,641

 

 

 

 

 

 

 

Outstanding Common Stock Options Having No Dilutive Effect

 

3,066

 

63,202

 

 

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

 

2



 

Abbott Laboratories and Subsidiaries

 

Condensed Consolidated Statement of Comprehensive Income

 

(Unaudited)

 

(dollars thousands)

 

 

 

Three Months Ended March 31

 

 

 

2012

 

2011

 

Net Earnings

 

$

1,242,124

 

$

863,818

 

Foreign currency translation gain adjustments

 

659,017

 

1,616,971

 

Amortization of net actuarial losses and prior service cost and credits, net of taxes of $22,966 in 2012 and $16,877 in 2011

 

39,855

 

29,817

 

Unrealized (loss) gain on marketable equity securities, net of taxes of $(113) in 2012 and $591 in 2011

 

(196

)

1,024

 

Net adjustments for derivative instruments designated as cash flow hedges, net of taxes of $5,137 in 2012 and $(24,749) in 2011

 

(42,610

)

(98,917

)

Other Comprehensive income

 

656,066

 

1,548,895

 

Comprehensive Income

 

$

1,898,190

 

$

2,412,713

 

 

 

 

March 31

 

December 31

 

 

 

2012

 

2011

 

Supplemental Accumulated Other Comprehensive Income Information, net of tax:

 

 

 

 

 

Cumulative foreign currency translation (gain) loss adjustments

 

$

(586,490

)

$

72,527

 

Net actuarial losses and prior service cost and credits

 

2,690,764

 

2,730,619

 

Cumulative unrealized (gains) on marketable equity securities

 

(38,233

)

(38,429

)

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

 

(124,922

)

(167,532

)

 

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

 

3



 

Abbott Laboratories and Subsidiaries

 

Condensed Consolidated Statement of Cash Flows

 

(Unaudited)

 

(dollars in thousands)

 

 

 

Three Months Ended March 31

 

 

 

2012

 

2011

 

Cash Flow From (Used in) Operating Activities:

 

 

 

 

 

Net earnings

 

$

1,242,124

 

$

863,818

 

Adjustments to reconcile earnings to net cash from operating activities -

 

 

 

 

 

 

 

 

 

 

 

Depreciation

 

354,211

 

354,120

 

Amortization of intangibles

 

389,056

 

391,547

 

Share-based compensation

 

197,342

 

175,808

 

Acquired in-process and collaborations research and development

 

150,000

 

100,000

 

Trade receivables

 

132,482

 

298,953

 

Inventories

 

(170,687

)

44,784

 

Other, net

 

(69,598

)

(217,884

)

Net Cash From Operating Activities

 

2,224,930

 

2,011,146

 

 

 

 

 

 

 

Cash Flow From (Used in) Investing Activities:

 

 

 

 

 

Acquisitions of property and equipment

 

(453,330

)

(391,813

)

Acquisition of businesses and technology

 

(670,849

)

 

Purchases of investment securities, net

 

(3,899,584

)

(1,917,221

)

Other

 

11,149

 

7,804

 

Net Cash (Used in) Investing Activities

 

(5,012,614

)

(2,301,230

)

 

 

 

 

 

 

Cash Flow From (Used in) Financing Activities:

 

 

 

 

 

Proceeds from issuance of short-term debt and other

 

1,399,029

 

396,213

 

Payment of long-term debt

 

(54,000

)

(500,582

)

Purchases of common shares

 

(987,686

)

(71,750

)

Proceeds from stock options exercised, including income tax benefit

 

687,279

 

175,752

 

Dividends paid

 

(758,548

)

(683,967

)

Net Cash From (Used in) Financing Activities

 

286,074

 

(684,334

)

 

 

 

 

 

 

Effect of exchange rate changes on cash and cash equivalents

 

34,700

 

66,203

 

 

 

 

 

 

 

Net Decrease in Cash and Cash Equivalents

 

(2,466,910

)

(908,215

)

Cash and Cash Equivalents, Beginning of Year

 

6,812,820

 

3,648,371

 

Cash and Cash Equivalents, End of Period

 

$

4,345,910

 

$

2,740,156

 

 

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

 

4



 

Abbott Laboratories and Subsidiaries

 

Condensed Consolidated Balance Sheet

 

(Unaudited)

 

(dollars in thousands)

 

 

 

March 31

 

December 31

 

 

 

2012

 

2011

 

Assets

 

 

 

 

 

Current Assets:

 

 

 

 

 

Cash and cash equivalents

 

$

4,345,910

 

$

6,812,820

 

Investments, primarily time deposits and certificates of deposit

 

5,180,651

 

1,284,539

 

Trade receivables, less allowances of $422,157 in 2012 and $420,579 in 2011

 

7,659,882

 

7,683,920

 

Inventories:

 

 

 

 

 

Finished products

 

2,320,275

 

2,220,527

 

Work in process

 

497,466

 

432,358

 

Materials

 

731,607

 

631,364

 

Total inventories

 

3,549,348

 

3,284,249

 

Prepaid expenses, deferred income taxes, and other receivables

 

4,866,340

 

4,703,246

 

Total Current Assets

 

25,602,131

 

23,768,774

 

Investments

 

374,746

 

378,225

 

Property and Equipment, at Cost

 

18,379,308

 

18,016,565

 

Less: accumulated depreciation and amortization

 

10,424,051

 

10,142,610

 

Net Property and Equipment

 

7,955,257

 

7,873,955

 

Intangible Assets, net of amortization

 

9,792,287

 

9,989,636

 

Goodwill

 

15,903,365

 

15,705,380

 

Deferred Income Taxes and Other Assets

 

2,788,015

 

2,560,923

 

 

 

$

62,415,801

 

$

60,276,893

 

Liabilities and Shareholders’ Investment

 

 

 

 

 

Current Liabilities:

 

 

 

 

 

Short-term borrowings

 

$

3,757,859

 

$

2,347,859

 

Trade accounts payable

 

1,726,962

 

1,721,127

 

Salaries, wages and commissions

 

1,021,925

 

1,260,121

 

Other accrued liabilities

 

7,689,629

 

7,854,994

 

Dividends payable

 

802,611

 

754,284

 

Income taxes payable

 

759,361

 

514,947

 

Current portion of long-term debt

 

1,027,576

 

1,026,896

 

Total Current Liabilities

 

16,785,923

 

15,480,228

 

Long-term Debt

 

11,861,505

 

12,039,822

 

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

 

8,224,939

 

8,230,698

 

Commitments and Contingencies

 

 

 

 

 

Shareholders’ Investment:

 

 

 

 

 

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

 

 

 

Common shares, without par value Authorized - 2,400,000,000 shares Issued at stated capital amount - Shares: 2012: 1,652,439,855; 2011: 1,638,870,201

 

10,378,070

 

9,817,134

 

Common shares held in treasury, at cost - Shares: 2012: 79,048,388; 2011: 68,491,382

 

(4,297,725

)

(3,687,478

)

Earnings employed in the business

 

21,314,465

 

20,907,362

 

Accumulated other comprehensive income (loss)

 

(1,941,119

)

(2,597,185

)

Total Abbott Shareholders’ Investment

 

25,453,691

 

24,439,833

 

Noncontrolling Interests in Subsidiaries

 

89,743

 

86,312

 

Total Shareholders’ Investment

 

25,543,434

 

24,526,145

 

 

 

$

62,415,801

 

$

60,276,893

 

 

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

 

5


 

 


 

Abbott Laboratories and Subsidiaries

 

Notes to Condensed Consolidated Financial Statements

 

March 31, 2012

 

(Unaudited)

 

Note 1 — Basis of Presentation

 

The accompanying unaudited, condensed consolidated financial statements have been prepared pursuant to rules and regulations of the Securities and Exchange Commission and, therefore, do not include all information and footnote disclosures normally included in audited financial statements.  However, in the opinion of management, all adjustments (which include only normal adjustments) necessary to present fairly the results of operations, financial position and cash flows have been made.  It is suggested that these statements be read in conjunction with the financial statements included in Abbott’s Annual Report on Form 10-K for the year ended December 31, 2011. The consolidated financial statements include the accounts of the parent company and subsidiaries, after elimination of intercompany transactions.

 

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

 

Note 2 — Supplemental Financial Information

 

Unvested restricted stock units that contain non-forfeitable rights to dividends are treated as participating securities and are included in the computation of earnings per share under the two-class method.  Under the two-class method, net earnings are allocated between common shares and participating securities.  Net earnings allocated to common shares for the three months ended March 31, 2012 and 2011 were $1.238 billion and $862 million, respectively.

 

Other (income) expense, net, for 2012 includes income of approximately $60 million from the resolution of a contractual agreement.  Other, net in Net cash from operating activities for 2012 and 2011 includes the effects of contributions to defined benefit plans of $290 million and $288 million, respectively, and to the post-employment medical and dental benefit plans of $40 million in each quarter.

 

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

 

 

 

March 31

 

December 31

 

(dollars in millions)

 

2012

 

2011

 

Equity securities

 

$

314

 

$

317

 

Other

 

61

 

61

 

Total

 

$

375

 

$

378

 

 

Note 3 — Taxes on Earnings

 

Taxes on earnings reflect the estimated annual effective rates and include charges for interest and penalties. The effective tax rates are less than the statutory U.S. federal income tax rate principally due to the benefit of lower statutory tax rates and tax exemptions in several foreign taxing jurisdictions.  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 up to $550 million, including cash adjustments, within the next twelve months as a result of concluding various tax matters.  Additional cash payments as a result of concluding these various tax matters beyond what is already on deposit with the tax authorities is not expected to be material.

 

6



 

Notes to Condensed Consolidated Financial Statements

March 31, 2012

(Unaudited), continued

 

Note 4 — Litigation and Environmental Matters

 

Abbott has been identified as a potentially responsible party for investigation and cleanup costs at a number of locations in the United States and Puerto Rico under federal and state remediation laws and is investigating potential contamination at a number of company-owned locations.  Abbott has recorded an estimated cleanup cost for each site for which management believes Abbott has a probable loss exposure.  No individual site cleanup exposure is expected to exceed $3 million, and the aggregate cleanup exposure is not expected to exceed $15 million.

 

There are a number of patent disputes with third parties who claim Abbott’s products infringe their patents.  On February 21, 2012 the United States Supreme Court denied Centocor Inc.’s and New York University’s s petition to review a February 2011 Federal Circuit Court of Appeals decision reversing a $1.67 billion judgment in favor of Centocor and the New York University on a patent they claimed Abbott’s HUMIRA infringed. This decision concludes the case.

 

The United States Department of Justice, through the United States Attorney for the Western District of Virginia, and various state Attorneys General investigated Abbott’s sales and marketing activities for Depakote.  The government sought to determine whether any of these activities violated civil and/or criminal laws, including the Federal False Claims Act, the Food, Drug and Cosmetic Act, and the Anti-Kickback Statute in connection with Medicare and/or Medicaid reimbursement to third parties.  The state Attorneys General offices sought to determine whether any of these activities violated various state laws, including state consumer fraud/protection statutes.  Discussions to resolve potential civil and criminal claims arising from this matter advanced to a point where Abbott believed a loss was probable and estimable and therefore, Abbott recorded charges of $1.5 billion in the third quarter of 2011 and $100 million in the first quarter of 2012.  In May 2012, Abbott reached resolution of all Depakote-related federal claims, Medicaid-related claims with 49 states and the District of Columbia, and consumer protection claims with 45 states and the District of Columbia.  The settlement of the federal claims is subject to approval by the United States District Court for the Western District of Virginia.

 

Within the next year, legal proceedings may occur that may result in a change in the estimated reserves recorded by Abbott.  For its legal proceedings and environmental exposures Abbott estimates the range of possible loss to be from approximately $1.71 billion to $1.74 billion, which includes the $1.6 billion charge discussed above.  The recorded reserve balance at March 31, 2012 for these proceedings and exposures was approximately $1.72 billion.  These reserves represent management’s best estimate of probable loss, as defined by FASB ASC No. 450, “Contingencies.”

 

While it is not feasible to predict the outcome of all such proceedings and exposures with certainty, management believes that their ultimate disposition should not have a material adverse effect on Abbott’s financial position, cash flows, or results of operations except for the government investigation discussed in the third paragraph of this footnote, where payment of the settlement is expected to be material to cash flows in 2012.

 

7



 

Notes to Condensed Consolidated Financial Statements

March 31, 2012

(Unaudited), continued

 

Note 5 — Post-Employment Benefits

 

Retirement plans consist of defined benefit, defined contribution, and medical and dental plans.  Net cost for the three 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

 

(dollars in millions)

 

2012

 

2011

 

2012

 

2011

 

 

 

 

 

 

 

 

 

 

 

Service cost - benefits earned during the period

 

$

97

 

$

80

 

$

15

 

$

15

 

Interest cost on projected benefit obligations

 

113

 

113

 

20

 

24

 

Expected return on plans’ assets

 

(154

)

(149

)

(8

)

(9

)

Net amortization

 

62

 

44

 

(2

)

2

 

Net cost

 

$

118

 

$

88

 

$

25

 

$

32

 

 

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 2012 and 2011, $290 million and $288 million, respectively, was contributed to defined benefit plans and $40 million was contributed to the post-employment medical and dental benefit plans in each quarter.

 

Note 6 — Segment Information

 

Abbott’s principal business is the discovery, development, manufacture and sale of a broad line of health care products.  Abbott’s products are generally sold directly to retailers, wholesalers, hospitals, health care facilities, laboratories, physicians’ offices and government agencies throughout the world.  Effective January 1, 2012, certain international operations were transferred from the Established Pharmaceutical Products segment to the Proprietary Pharmaceutical Products segment.  The segment information below has been adjusted to reflect this reorganization.  Abbott’s reportable segments are as follows:

 

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

 

Established Pharmaceutical Products — International sales of a broad line of branded generic pharmaceutical products.

 

Nutritional Products — Worldwide sales of a broad line of adult and pediatric nutritional products.

 

Diagnostic Products — Worldwide sales of diagnostic systems and tests for blood banks, hospitals, commercial laboratories and alternate-care testing sites.  For segment reporting purposes, the Core Laboratories Diagnostics, Molecular Diagnostics, Point of Care and Ibis diagnostic divisions are aggregated and reported as the Diagnostic Products segment.

 

Vascular Products — Worldwide sales of coronary, endovascular, structural heart, vessel closure and other medical device products.

 

Non-reportable segments include the Diabetes Care and Medical Optics segments.

 

Abbott’s underlying accounting records are maintained on a legal entity basis for government and public reporting requirements.  Segment disclosures are on a performance basis consistent with internal management reporting.  Intersegment transfers of inventory are recorded at standard cost and are not a measure of segment operating earnings.  The cost of some corporate functions and the cost of certain employee benefits are charged to segments at predetermined rates that approximate cost.  Remaining costs, if any, are not allocated to segments.  For acquisitions prior to 2006, substantially all intangible assets and related amortization are not allocated to segments.  In addition, no intangible assets or related amortization are allocated to the Established Pharmaceutical Products segment.  The following segment information has been prepared in accordance with the internal accounting policies of Abbott, as described above, and are not presented in accordance with generally accepted accounting principles applied to the consolidated financial statements.

 

8



 

Notes to Condensed Consolidated Financial Statements

March 31, 2012

(Unaudited), continued

 

 

 

Three Months Ended March 31

 

 

 

Net Sales to
External Customers

 

Operating
Earnings

 

(dollars in millions)

 

2012

 

2011

 

2012

 

2011

 

Proprietary Pharmaceutical Products

 

$

4,072

 

$

3,801

 

$

1,560

 

$

1,361

 

Established Pharmaceutical Products

 

1,257

 

1,277

 

293

 

290

 

Nutritional Products

 

1,566

 

1,423

 

260

 

155

 

Diagnostic Products

 

1,042

 

983

 

192

 

170

 

Vascular Products

 

803

 

845

 

233

 

226

 

Total Reportable Segments

 

8,740

 

8,329

 

2,538

 

2,202

 

Other

 

717

 

712

 

 

 

 

 

Net Sales

 

$

9,457

 

$

9,041

 

 

 

 

 

Corporate functions and benefit plans costs

 

 

 

 

 

(143

)

(133

)

Non-reportable segments

 

 

 

 

 

130

 

58

 

Net interest expense

 

 

 

 

 

(109

)

(124

)

Share-based compensation (a)

 

 

 

 

 

(197

)

(176

)

Acquired in-process and collaborations research and development

 

 

 

 

 

(150

)

(100

)

Other, net

 

 

 

 

 

(556

)

(658

)

Consolidated Earnings Before Taxes

 

 

 

 

 

$

1,513

 

$

1,069

 

 


(a)          Approximately 40 to 45 percent of the annual net cost of share-based awards will typically be recognized in the first quarter due to the timing of the granting of share-based awards.

 

Note 7 — Incentive Stock Programs

 

In the first three months of 2012, Abbott granted 1,884,400 stock options, 355,576 replacement stock options, 985,300 restricted stock awards and 6,681,587 restricted stock units under these programs.  At March 31, 2012, approximately 157 million shares were reserved for future grants.  Information regarding the number of options outstanding and exercisable at March 31, 2012 is as follows:

 

 

 

Outstanding

 

Exercisable

 

Number of shares

 

72,723,156

 

68,503,796

 

Weighted average remaining life (years)

 

4.9

 

4.6

 

Weighted average exercise price

 

$

50.79

 

$

50.63

 

Aggregate intrinsic value (in millions)

 

$

793

 

$

760

 

 

The total unrecognized share-based compensation cost at March 31, 2012 amounted to approximately $460 million which is expected to be recognized over the next three years.

 

9



 

Notes to Condensed Consolidated Financial Statements

March 31, 2012

(Unaudited), continued

 

Note 8 —Business and Technology Acquisitions

 

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

 

In 2010, Abbott entered into an agreement to acquire licensing rights outside the U.S., excluding certain Asian markets, to a product in development for the treatment of chronic kidney disease.  In the first quarter of 2011, certain milestones were achieved resulting in the recording of $100 million of acquired in-process and collaborations research and development.  In the first quarter of 2012, $50 million of research and development expense was recorded related to the achievement of a clinical development milestone under this agreement.

 

Note 9 — Financial Instruments, Derivatives and Fair Value Measures

 

Certain Abbott foreign subsidiaries enter into foreign currency forward exchange contracts to manage exposures to changes in foreign exchange rates for anticipated intercompany purchases by those subsidiaries whose functional currencies are not the U.S. dollar.  These contracts, totaling $1.0 billion and $1.6 billion at March 31, 2012 and December 31, 2011, respectively, are designated as cash flow hedges of the variability of the cash flows due to changes in foreign exchange rates and are recorded at fair value.  Accumulated gains and losses as of March 31, 2012 will be included in Cost of products sold at the time the products are sold, generally through the next twelve months.  The amount of hedge ineffectiveness was not significant in 2012 and 2011.

 

Abbott enters into foreign currency forward exchange contracts to manage currency exposures for foreign currency denominated third-party trade payables and receivables, and for intercompany loans and trade accounts payable where the receivable or payable is denominated in a currency other than the functional currency of the entity.  For intercompany loans, the contracts require Abbott to sell or buy foreign currencies, primarily European currencies and Japanese yen, in exchange for primarily U.S. dollars and other European currencies.  For intercompany and trade payables and receivables, the currency exposures are primarily the U.S. dollar, European currencies and Japanese yen.  At March 31, 2012 and December 31, 2011, Abbott held $15.8 billion and $15.7 billion, respectively, of such foreign currency forward exchange contracts.

 

Abbott has designated foreign denominated short-term debt as a hedge of the net investment in a foreign subsidiary of approximately $645 million and approximately $680 million as of March 31, 2012 and December 31, 2011, respectively.  Accordingly, changes in the fair value of this debt due to changes in exchange rates are recorded in Accumulated other comprehensive income (loss), net of tax.

 

Abbott is a party to interest rate swap contracts totaling $6.8 billion at March 31, 2012 and December 31, 2011 to manage its exposure to changes in the fair value of fixed-rate debt.  These contracts are designated as fair value hedges of the variability of the fair value of fixed-rate debt due to changes in the long-term benchmark interest rates.  The effect of the hedge is to change a fixed-rate interest obligation to a variable rate for that portion of the debt.  Abbott records the contracts at fair value and adjusts the carrying amount of the fixed-rate debt by an offsetting amount.  No hedge ineffectiveness was recorded in income in 2012 or 2011 for these hedges.

 

10



 

Notes to Condensed Consolidated Financial Statements

March 31, 2012

(Unaudited), continued

 

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

 

 

 

Fair Value - Assets

 

Fair Value - Liabilities

 

(dollars in millions)

 

March 31
2012

 

Dec. 31
2011

 

Balance Sheet Caption

 

March 31
2012

 

Dec. 31
2011

 

Balance Sheet Caption

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest rate swaps designated as fair value hedges

 

$

588

 

$

598

 

Deferred income taxes and other assets

 

$

 

$

 

n/a

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Foreign currency forward exchange contracts —

 

 

 

 

 

 

 

 

 

 

 

 

 

Hedging instruments

Others not designated as hedges

 

51

58

 

115

165

 

Prepaid expenses, deferred income taxes, and other receivables

 

63

 

2

179

 

Other accrued liabilities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

 

 

 

n/a

 

645

 

680

 

Short-term borrowings

 

 

 

$

697

 

$

878

 

 

 

$

708

 

$

861

 

 

 

 

The following table summarizes the activity for foreign currency forward exchange contracts designated as cash flow hedges, debt designated as a hedge of net investment in a foreign subsidiary and the amounts and location of income (expense) and gain (loss) reclassified into income in the first three months of 2012 and 2011 and for certain other derivative financial instruments.  The amount of hedge ineffectiveness was not significant in 2012 and 2011 for these hedges.

 

 

 

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

 

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

 

 

 

(dollars in millions)

 

2012

 

2011

 

2012

 

2011

 

Income Statement Caption

 

 

 

 

 

 

 

 

 

 

 

 

 

Foreign currency forward exchange contracts designated as cash flow hedges

 

$

82

 

$

(22

)

$

15

 

$

57

 

Cost of products sold

 

 

 

 

 

 

 

 

 

 

 

 

 

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

 

35

 

10

 

 

 

n/a

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest rate swaps designated as fair value hedges

 

n/a

 

n/a

 

(10

)

(36

)

Interest expense

 

 

 

 

 

 

 

 

 

 

 

 

 

Foreign currency forward exchange contracts not designated as a hedge

 

n/a

 

n/a

 

16

 

(101

)

Net foreign exchange loss (gain)

 

 

The interest rate swaps are designated as fair value hedges of the variability of the fair value of fixed-rate debt due to changes in the long-term benchmark interest rates.  The hedged debt is marked to market, offsetting the effect of marking the interest rate swaps to market.

 

11


 

 


 

Notes to Condensed Consolidated Financial Statements

March 31, 2012

(Unaudited), continued

 

The carrying values and fair values of certain financial instruments as of March 31, 2012 and December 31, 2011 are shown in the table below. The carrying values of all other financial instruments approximate their estimated fair values.  The counterparties to financial instruments consist of select major international financial institutions.  Abbott does not expect any losses from nonperformance by these counterparties.

 

 

 

March 31 2012

 

December 31 2011

 

(dollars in millions)

 

Carrying
Value

 

Fair
Value

 

Carrying
Value

 

Fair
Value

 

Investment Securities:

 

 

 

 

 

 

 

 

 

Current

 

$

15

 

$

15

 

$

20

 

$

20

 

Long-term:

 

 

 

 

 

 

 

 

 

Equity securities

 

314

 

314

 

317

 

317

 

Other

 

61

 

40

 

61

 

42

 

Total Long-term Debt

 

(12,889

)

(15,214

)

(13,067

)

(15,129

)

Foreign Currency Forward Exchange Contracts:

 

 

 

 

 

 

 

 

 

Receivable position

 

109

 

109

 

280

 

280

 

(Payable) position

 

(63

)

(63

)

(181

)

(181

)

Interest Rate Hedge Contracts

 

588

 

588

 

598

 

598

 

 

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

 

(dollars in millions)

 

Outstanding
Balances

 

Quoted
Prices in
Active
Markets

 

Significant
Other
Observable
Inputs

 

Significant
Unobservable
Inputs

 

March 31, 2012:

 

 

 

 

 

 

 

 

 

Equity securities

 

$

89

 

$

89

 

$

 

$

 

Interest rate swap derivative financial instruments

 

588

 

 

588

 

 

Foreign currency forward exchange contracts

 

109

 

 

109

 

 

Total Assets

 

$

786

 

$

89

 

$

697

 

$

 

 

 

 

 

 

 

 

 

 

 

Fair value of hedged long-term debt

 

$

7,324

 

$

 

$

7,324

 

$

 

Foreign currency forward exchange contracts

 

63

 

 

63

 

 

Contingent consideration related to business combinations

 

294

 

 

 

294

 

Total Liabilities

 

$

7,681

 

$

 

$

7,387

 

$

294

 

 

 

 

 

 

 

 

 

 

 

December 31, 2011:

 

 

 

 

 

 

 

 

 

Equity securities

 

$

93

 

$

93

 

$

 

$

 

Interest rate swap derivative financial instruments

 

598

 

 

598

 

 

Foreign currency forward exchange contracts

 

280

 

 

280

 

 

Total Assets

 

$

971

 

$

93

 

$

878

 

$

 

 

 

 

 

 

 

 

 

 

 

Fair value of hedged long-term debt

 

$

7,427

 

$

 

$

7,427

 

$

 

Foreign currency forward exchange contracts

 

181

 

 

181

 

 

Contingent consideration related to business combinations

 

423

 

 

 

423

 

Total Liabilities

 

$

8,031

 

$

 

$

7,608

 

$

423

 

 

The fair value of the debt was determined based on the face value of the debt adjusted for the fair value of the interest rate swaps, which is based on a discounted cash flow analysis.  The fair value of the contingent consideration was determined based on an independent appraisal adjusted for the time value of money, exchange, payments and other changes in fair value.

 

12



 

Notes to Condensed Consolidated Financial Statements

March 31, 2012

(Unaudited), continued

 

Note 10 — Goodwill and Intangible Assets

 

Foreign currency translation adjustments and other adjustments increased goodwill in the first three months of 2012 and 2011 by approximately $200 million and approximately $700 million, respectively. The amount of goodwill related to reportable segments at March 31, 2012 was $6.3 billion for the Proprietary Pharmaceutical Products segment, $3.1 billion for the Established Pharmaceutical Products segment, $207 million for the Nutritional Products segment, $383 million for the Diagnostic Products segment, and $2.7 billion for the Vascular Products segment.  There were no significant reductions of goodwill relating to impairments or disposal of all or a portion of a business.

 

The gross amount of amortizable intangible assets, primarily product rights and technology was $17.6 billion as of March 31, 2012 and $17.5 billion as of December 31, 2011, and accumulated amortization was $8.6 billion as of March 31, 2012 and $8.3 billion as of December 31, 2011. Indefinite-lived intangible assets, which relate to in-process research and development acquired in a business combination, was approximately $778 million at March 31, 2012 and $ 814 million at December 31, 2011. The estimated annual amortization expense for intangible assets is approximately $1.5 billion in 2012, $1.3 billion in 2013, $1.0 billion in 2014, $800 million in 2015 and $765 million in 2016.  Intangible asset amortization is included in Cost of products sold in the condensed consolidated statement of earnings.  Amortizable intangible assets are amortized over 2 to 30 years (average 11 years).

 

Note 11 — Restructuring Plans

 

In 2011 and prior years, Abbott management approved plans to realign its worldwide pharmaceutical and vascular manufacturing operations and selected domestic and international commercial and research and development operations in order to reduce costs.  In the first three months of 2011, Abbott recorded $49 million to Cost of products sold, $18 million to Research and development and $49 million to Selling, general and administrative.  The following summarizes the activity for these restructurings: (dollars in millions)

 

 

 

2012

 

2011

 

Accrued balance at January 1

 

$

177

 

$

77

 

Restructuring charges

 

 

116

 

Payments and other adjustments

 

1

 

(30

)

Accrued balance at March 31

 

$

178

 

$

163

 

 

Additional charges of $30 million and $4 million were recorded in the first three months of 2012 and 2011, respectively, relating to these restructurings, primarily for accelerated depreciation.

 

In 2010, Abbott management approved a restructuring plan primarily related to the acquisition of Solvay Pharmaceuticals.  This plan streamlines operations, improves efficiencies and reduces costs in certain Solvay sites and functions as well as in certain Abbott and Solvay commercial organizations in various countries.   The following summarizes the activity for this restructuring: (dollars in millions)

 

 

 

2012

 

2011

 

Accrued balance at January 1

 

$

108

 

$

410

 

Payments and other adjustments

 

(61

)

(62

)

Accrued balance at March 31

 

$

47

 

$

348

 

 

Additional charges of approximately $2 million and $44 million were recorded in the first three months of 2012 and 2011, respectively, relating to this restructuring, primarily for employee severance.

 

13



 

Notes to Condensed Consolidated Financial Statements

March 31, 2012

(Unaudited), continued

 

In 2011 and 2008, Abbott management approved a plan to streamline global manufacturing operations, reduce overall costs, and improve efficiencies in Abbott’s core diagnostic business.  The following summarizes the activity for this restructuring: (dollars in millions)

 

 

 

2012

 

2011

 

Accrued balance at January 1

 

$

79

 

$

88

 

Payments and other adjustments

 

(11

)

(3

)

Accrued balance at March 31

 

$

68

 

$

85

 

 

Additional charges of approximately $4 million and $9 million were recorded in the first three months of 2012 and 2011, respectively, relating to this restructuring, primarily for accelerated depreciation and product transfer costs.  Additional charges will occur through 2012 as a result of product re-registration timelines required under manufacturing regulations in a number of countries and product transition timelines.

 

Note 12 — Separation of Abbott’s Proprietary Pharmaceuticals Business

 

In October 2011, Abbott announced a plan to separate into two publicly traded companies, one in diversified medical products and the other in research-based pharmaceuticals.  To accomplish the separation, Abbott plans to create a new company called AbbVie for its research-based pharmaceuticals business which will include Abbott’s Proprietary Pharmaceutical Products segment.  The transaction is expected to take the form of a tax-free distribution to Abbott shareholders of the stock of the newly created research-based pharmaceutical company and is expected to be completed by the end of 2012.   Subsequent to the separation, the historical results of the research-based pharmaceuticals business will be presented as discontinued operations.  Annual net sales for the new research based pharmaceuticals business were approximately $17.4 billion in 2011.

 

14



 

FINANCIAL REVIEW

 

Results of Operations

 

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

 

(dollars in millions)

 

2012

 

Percent
Change

 

2011

 

Percent
Change

 

 

 

 

 

 

 

 

 

 

 

Proprietary Pharmaceutical Products

 

$

4,072

 

7.1

 

$

3,801

 

11.9

 

Established Pharmaceutical Products

 

1,257

 

(1.6

)

1,277

 

81.8

 

Nutritional Products

 

1,566

 

10.1

 

1,423

 

7.8

 

Diagnostic Products

 

1,042

 

6.1

 

983

 

7.4

 

Vascular Products

 

803

 

(4.9

)

845

 

13.1

 

Total Reportable Segments

 

8,740

 

4.9

 

8,329

 

17.5

 

Other

 

717

 

0.6

 

712

 

16.3

 

Net Sales

 

$

9,457

 

4.6

 

$

9,041

 

17.4

 

 

 

 

 

 

 

 

 

 

 

Total U.S.

 

$

3,722

 

5.8

 

$

3,517

 

8.1

 

 

 

 

 

 

 

 

 

 

 

Total International

 

$

5,735

 

3.8

 

$

5,524

 

24.3

 

 

The net sales growth in 2012 reflects unit growth, partially offset by unfavorable exchange.  Excluding 1.3 percent of unfavorable exchange, net sales increased 5.9 percent in 2012.  The relatively stronger U.S. dollar decreased first quarter 2012 Total International sales by 2.1 percent, decreased Proprietary Pharmaceutical Products segment sales by 1.2 percent, decreased Established Pharmaceutical Products segment sales by 3.5 percent, decreased Nutritional Product segment sales by 0.3 percent, decreased Diagnostic Products segment sales by 1.4 percent and decreased Vascular Products segment sales by 0.5 percent over the first quarter of 2011.  The decrease in 2012 Vascular Products sales is due to the winding down of royalty and supply agreements related to certain third party products, including Promus.  Excluding this royalty and supply agreement revenue in both periods and the negative effect of exchange, Vascular Products sales increased 4.3 percent in 2012.

 

The net sales growth in 2011 reflects unit growth, the acquisitions of Solvay’s pharmaceuticals business in February 2010 and Piramal Healthcare Limited’s Healthcare Solution business in September 2010 and the effect of exchange.  Excluding 1.3 percent of favorable exchange, net sales increased 16.1 percent in 2011.  The relatively weaker U.S. dollar increased first quarter 2011 Total International sales by 2.2 percent, increased Proprietary Pharmaceutical Products segment sales by 0.5 percent, increased Established Pharmaceutical Products segment sales by 2.9 percent, increased Nutritional Product segment sales by 2.0 percent, increased Diagnostic Products segment sales by 1.2 percent and increased Vascular Products segment sales by 1.6 percent over the first quarter of 2010.  Sales growth in 2011 in the Established Pharmaceutical Products segment and in Total International sales was impacted by the acquisitions of Solvay Pharmaceuticals in February 2010 and Piramal Healthcare Limited’s Healthcare solutions business in September 2010.

 

15



 

FINANCIAL REVIEW

(continued)

 

A comparison of significant product group sales for the three months ended March 31 is as follows.  Percent changes are versus the prior year and are based on unrounded numbers.

 

(dollars in millions)

 

2012

 

Percent
Change

 

2011

 

Percent
Change

 

Proprietary Pharmaceuticals —

 

 

 

 

 

 

 

 

 

Total U.S. Proprietary sales

 

$

2,053

 

7

 

$

1,927

 

13

 

HUMIRA

 

773

 

23

 

630

 

16

 

TRILIPIX/TriCor

 

254

 

(12

)

289

 

4

 

Niaspan

 

191

 

(15

)

226

 

11

 

AndroGel

 

232

 

23

 

188

 

n/m

 

Lupron

 

141

 

18

 

119

 

11

 

Synthroid

 

129

 

11

 

117

 

19

 

Kaletra

 

55

 

(15

)

64

 

(10

)

 

 

 

 

 

 

 

 

 

 

Total International Proprietary sales

 

2,019

 

8

 

1,874

 

11

 

HUMIRA

 

1,161

 

14

 

1,016

 

19

 

Synagis

 

346

 

7

 

325

 

7

 

Kaletra

 

166

 

(10

)

184

 

(17

)

Lupron

 

58

 

(10

)

65

 

1

 

 

 

 

 

 

 

 

 

 

 

Total Established Pharmaceutical Products sales —

 

1,257

 

(2

)

1,277

 

82

 

Clarithromycin

 

144

 

(5

)

152

 

7

 

TriCor and Lipanthyl (fenofibrate)

 

75

 

(5

)

79

 

n/m

 

Creon

 

78

 

14

 

69

 

n/m

 

Serc

 

52

 

(18

)

63

 

n/m

 

Duphaston

 

61

 

(9

)

66

 

n/m

 

Synthroid

 

26

 

2

 

25

 

12

 

 

 

 

 

 

 

 

 

 

 

Nutritionals —

 

 

 

 

 

 

 

 

 

U.S. Pediatric Nutritionals

 

357

 

15

 

309

 

 

International Pediatric Nutritionals

 

503

 

13

 

446

 

14

 

U.S. Adult Nutritionals

 

347

 

7

 

324

 

2

 

International Adult Nutritionals

 

356

 

5

 

340

 

18

 

 

 

 

 

 

 

 

 

 

 

Diagnostics —

 

 

 

 

 

 

 

 

 

Immunochemistry

 

800

 

6

 

752

 

7

 

 

 

 

 

 

 

 

 

 

 

Vascular Products (1) —

 

 

 

 

 

 

 

 

 

Xience

 

404

 

7

 

378

 

32

 

Other Coronary Products

 

155

 

3

 

150

 

6

 

Endovascular

 

114

 

5

 

109

 

11

 

n/m — Percent change is not meaningful

 

 

 

 

 

 

 

 

 

 


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

 

Total Established Pharmaceutical Products sales decreased in 2012 due to the negative effect of exchange and decreased sales of Clarithromycin and Serc due to, in part, pricing pressures in Europe, partially offset by growth in emerging markets.  Excluding the effect of exchange, Total Established Pharmaceutical Products sales increased 1.9 percent.  U.S. Pediatric Nutritional sales in 2012 reflect market share gains for Similac and unit growth for PediaSure while 2011 sales were affected by the voluntary recall of certain Similac-brand powder infant formulas, primarily in the U.S. in September 2010.  The increase in 2012 U.S. Adult Nutritional sales reflects unit growth for the Ensure and Glucerna products.  International Pediatric and Adult Nutritionals sales increased in 2012 and 2011 due primarily to volume growth in developing countries. In addition to the product increases listed above, the 2011 growth in U.S. Proprietary product sales is due to the acquisition of Solvay Pharmaceuticals in February 2010.   The relatively weaker U.S. dollar increased International Pediatric sales and International Adult Nutritional sales in 2011 by 3.9 percent each.

 

16


 

 


 

FINANCIAL REVIEW

(continued)

 

The gross profit margin was 60.6 percent for the first quarter 2012, compared to 57.3 percent for the first quarter 2011.  The increase in the gross profit margin in 2012 was due primarily to favorable product mix and improved gross margins across all reportable segments.

 

Research and development expenses increased 8.1 percent in the first quarter 2012 over the first quarter 2011.  This increase reflects continued pipeline spending, including programs in biologics, chronic kidney disease, women’s health and hepatitis C.  The majority of research and development expenditures are concentrated on pharmaceutical products. $628 million of Abbott’s research and development expenses for the three months ended March 31, 2012 related to Abbott’s pharmaceutical products, of which $551 million was directly allocated to the Proprietary Pharmaceutical Products segment.  For the first three months ended March 31, 2012, research and development expenditures totaled $96 million for the Vascular Products segment, $85 million for the Diagnostics Products segment, $66 million for the Established Pharmaceutical Products segment and $42 million for the Nutritional Products segment.

 

Selling, general and administrative expenses for the first quarter 2012 increased 5.3 percent over the first quarter 2011.  Excluding any charges relating to acquisition integration, litigation, separation and restructurings in both periods, selling, general and administrative expenses increased 7.2 percent in 2012.  This increase reflects increased selling and marketing support for new and existing products, including spending for HUMIRA, and inflation.

 

Business and Technology Acquisitions

 

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

 

In 2010, Abbott entered into an agreement to acquire licensing rights outside the U.S., excluding certain Asian markets, to a product in development for the treatment of chronic kidney disease.  In the first quarter of 2011, certain milestones were achieved resulting in the recording of $100 million of acquired in-process and collaborations research and development.  In the first quarter of 2012, $50 million of research and development expense was recorded related to the achievement of a clinical development milestone under this agreement.

 

Restructuring Plans

 

In 2011 and prior years, Abbott management approved plans to realign its worldwide pharmaceutical and vascular manufacturing operations and selected domestic and international commercial and research and development operations in order to reduce costs.  In the first three months of 2011, Abbott recorded $49 million to Cost of products sold, $18 million to Research and development and $49 million to Selling, general and administrative.  The following summarizes the activity for these restructurings: (dollars in millions)

 

 

 

2012

 

2011

 

Accrued balance at January 1

 

$

177

 

$

77

 

Restructuring charges

 

 

116

 

Payments and other adjustments

 

1

 

(30

)

Accrued balance at March 31

 

$

178

 

$

163

 

 

Additional charges of $30 million and $4 million were recorded in the first three months of 2012 and 2011, respectively, relating to these restructurings, primarily for accelerated depreciation.

 

17



 

FINANCIAL REVIEW

(continued)

 

In 2010, Abbott management approved a restructuring plan primarily related to the acquisition of Solvay Pharmaceuticals.  This plan streamlines operations, improves efficiencies and reduces costs in certain Solvay sites and functions as well as in certain Abbott and Solvay commercial organizations in various countries.  The following summarizes the activity for this restructuring: (dollars in millions)

 

 

 

2012

 

2011

 

Accrued balance at January 1

 

$

108

 

$

410

 

Payments and other adjustments

 

(61

)

(62

)

Accrued balance at March 31

 

$

47

 

$

348

 

 

Additional charges of approximately $2 million and $44 million were recorded in the first three months of 2012 and 2011, respectively, relating to this restructuring, primarily for employee severance.

 

In 2011 and 2008, Abbott management approved a plan to streamline global manufacturing operations, reduce overall costs, and improve efficiencies in Abbott’s core diagnostic business.  The following summarizes the activity for this restructuring: (dollars in millions)

 

 

 

2012

 

2011

 

Accrued balance at January 1

 

$

79

 

$

88

 

Payments and other adjustments

 

(11

)

(3

)

Accrued balance at March 31

 

$

68

 

$

85

 

 

Additional charges of approximately $4 million and $9 million were recorded in the first three months of 2012 and 2011, respectively, relating to this restructuring, primarily for accelerated depreciation and product transfer costs.  Additional charges will occur through 2012 as a result of product re-registration timelines required under manufacturing regulations in a number of countries and product transition timelines.

 

Interest Expense (Income)

 

Interest expense decreased in the first quarter 2012 compared to 2011 due to a lower level of borrowing and interest income decreased in the first quarter 2012 compared to 2011 primarily as a result of lower interest rates.

 

Other (income) expense, net

 

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

 

Taxes on Earnings

 

Taxes on earnings reflect the estimated annual effective rates and include charges for interest and penalties. The effective tax rates are less than the statutory U.S. federal income tax rate principally due to the benefit of lower statutory tax rates and tax exemptions in several foreign taxing jurisdictions. 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 up to $550 million, including cash adjustments, within the next twelve months as a result of concluding various tax matters.  Additional cash payments as a result of concluding these various tax matters beyond what is already on deposit with the tax authorities is not expected to be material.

 

18



 

FINANCIAL REVIEW

(continued)

 

Liquidity and Capital Resources March 31, 2012 Compared with December 31, 2011

 

Net cash from operating activities for the first three months 2012 totaled approximately $2.2 billion.  Other, net in Net cash from operating activities for 2012 and 2011 includes the effects of contributions to defined benefit plans of $290 million and $288 million, respectively.  Abbott expects annual cash flow from operating activities to continue to exceed Abbott’s capital expenditures and cash dividends.

 

The United States Department of Justice, through the United States Attorney for the Western District of Virginia, and various state Attorneys General investigated Abbott’s sales and marketing activities for Depakote. Abbott recorded non-cash charges of $1.5 billion in the third quarter of 2011 and $100 million in the first quarter of 2012. In May 2012, Abbott reached resolution of all Depakote-related federal claims, Medicaid-related claims with 49 states and the District of Columbia, and consumer protection claims with 45 states and the District of Columbia.  The settlement of the federal claims is subject to approval by the United States District Court for the Western District of Virginia.  Payment of the settlement is expected to be material to cash flows in 2012.

 

Working capital was $8.8 billion at March 31, 2012 and $8.3 billion at December 31, 2011.  The increase in working capital in 2012 was due primarily to higher cash generated from operating activities.

 

At March 31, 2012 Abbott’s long-term debt rating was AA by Standard & Poor’s Corporation and A1 by Moody’s Investors Service.  Abbott has readily available financial resources, including unused lines of credit of $6.7 billion that support commercial paper borrowing arrangements of which a $3.0 billion facility expires in October 2012 and a $3.7 billion facility expires in 2013.

 

Abbott repaid $500 million of long-term notes that were due in March of 2011 using primarily short-term borrowings.

 

In October 2008, the board of directors authorized the purchase of up to $5 billion of Abbott’s common shares from time to time and 15.4 million shares were purchased in the first three months of 2012 under this authorization at a cost of approximately $868 million.  No shares were purchased under this authorization in the first three months of 2011.

 

Legislative Issues

 

In 2010, the Patient Protection and Affordable Care Act and the Health Care and Education Reconciliation Act (collectively referred to herein as “health care reform legislation”) were signed into law in the U.S.  Health care reform legislation included an increase in the basic Medicaid rebate rate from 15.1 percent to 23.1 percent and extended the rebate to drugs provided through Medicaid managed care organizations. These Medicaid rebate changes will continue to have a negative effect on the gross profit margin of the Proprietary Pharmaceutical Products segment in future years.

 

In 2011, Abbott began recording the annual fee imposed by health care reform legislation on companies that sell branded prescription drugs to specified government programs.  The amount of the annual fee, which totaled approximately $100 million in 2011, is based on the ratio of certain of Abbott’s sales as compared to the total such sales of all covered entities multiplied by a fixed dollar amount specified in the legislation by year.  In 2011, Abbott began incurring additional rebates related to the Medicare Part D coverage gap “donut hole.”  Beginning in 2013, Abbott will record the 2.3 percent excise tax imposed by health care reform legislation on the sale of certain medical devices in the U.S.

 

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 2011 Annual Report on Form 10-K.

 

19



 

FINANCIAL REVIEW

(continued)

 

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 2011 Annual Report on Form 10-K.

 

20



 

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, Thomas C. Freyman, 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 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, 2012, 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, except as noted below.

 

In January 2012, Abbott implemented a new enterprise resource planning system for a large part of its U.S. operations.  The system integrated various business processes and replaced a number of applications that were previously used within several of Abbott’s businesses for various financial reporting and operational purposes.  In connection with this implementation and related business process changes, Abbott replaced multiple internal controls that were previously considered effective with new or modified controls that are also expected to be effective.   The use of this system will be expanded in phases throughout 2012 and is expected to provide an improved structure to accommodate future business demands.

 

PART II.        OTHER INFORMATION

 

Item 1.            Legal Proceedings

 

Abbott is involved in various claims, legal proceedings and investigations, including (as of March 31, 2012, except where noted below) those described below.  While it is not feasible to predict the outcome of such pending claims, proceedings and investigations with certainty, management is of the opinion that their ultimate resolution should not have a material adverse effect on Abbott’s financial position, cash flows, or results of operations, except for the investigation and settlement discussed in the third paragraph of Note 4 to Abbott’s financial statements (also described in the third paragraph of this section). Payment of this settlement is expected to be material to cash flows in 2012.

 

21



 

In its 2011 Form 10-K, Abbott reported that a case was pending against Abbott in which New York University (NYU) and Centocor, Inc. asserted that adalimumab (a drug Abbott sells under the trademark Humira®) infringed a patent co-owned by NYU and Centocor and exclusively licensed to Centocor.  In February 2012, the United States Supreme Court denied Centocor’s petition for review.

 

In its 2011 Form 10-K, Abbott reported that the United States Department of Justice, through the United States Attorney for the Western District of Virginia, and various state Attorneys General offices were investigating Abbott's sales and marketing activities for Depakote. The government was seeking to determine whether any of these activities violated civil and/or criminal laws, including the Federal False Claims Act, the Food, Drug, and Cosmetic Act, and the Anti-Kickback Statute in connection with Medicare and/or Medicaid reimbursement paid to third parties.  The state Attorneys General offices were also seeking to determine whether any of these activities violated various state laws, including state consumer fraud/protection statutes.   On May 7, 2012, Abbott agreed to a settlement with the Department of Justice and with 49 states and the District of Columbia concerning their respective Medicare and/or Medicaid programs and agreed to pay approximately $800 million to resolve these civil claims.  Abbott also pled guilty to a one count charge alleging misbranding in violation of the Federal Food, Drug, and Cosmetic Act and agreed to pay a criminal penalty of approximately $700 million.   In addition, Abbott has agreed to pay approximately $100 million to 45 states and the District of Columbia to resolve certain civil claims based on state consumer fraud/protection statutes.  As part of the settlement, Abbott entered into a Corporate Integrity Agreement with the Office of Inspector General for United States Department of Health and Human Services and agreed to a term of probation.  The settlement is not expected to affect Abbott's ability to continue to do business with any private party or state or federal government.  The settlement and plea are subject to approval by the United States District Court for the Western District of Virginia.

 

In its 2011 Form 10-K, Abbott reported that the United States Department of Justice, through the United States Attorney for Maryland, is investigating the sales and marketing practices of Abbott for Micardis®, a drug co-promoted for (until March 31, 2006) and manufactured by Boehringer Ingelheim. The government is seeking to determine whether any of these practices resulted in any violations of civil and/or criminal laws, including the Federal False Claims Act and the Anti-Kickback Statute, in connection with the Medicare and/or Medicaid reimbursement paid to third parties.

 

In its 2011 Form 10-K, Abbott reported that the United States Department of Justice, through the United States Attorney’s Offices for the District of Massachusetts and the Eastern District of Tennessee, and the Texas State Attorney General are investigating the sales and marketing activities of Abbott’s biliary stent products. Investigations are also ongoing relating to the sales and marketing activities for Abbott’s carotid and coronary stents and stent related products by the United States Attorney’s Office for the Eastern District of Tennessee and the United States Attorney’s Office for the District of Maryland. The government is seeking to determine whether any of these activities violated civil and/or criminal laws, including the Federal False Claims Act, the Food, Drug, and Cosmetic Act, and the Anti-Kickback Statute in connection with Medicare and/or Medicaid reimbursement paid to third parties.  The United States Attorney’s Office for the District of Massachusetts has returned all documents produced by Abbott and Abbott considers that investigation closed.

 

In its 2011 Form 10-K, Abbott reported that in September 2009, Wyeth, Cordis Corporation, and Cordis LLC filed suit against Abbott in the United States District Court for the District of New Jersey alleging the Xience V (and later the Xience Prime) stent infringes the plaintiffs’ patents. In February 2012, the court stayed the litigation pending the completion of inter partes reexamination of the two patents at issue by the United States Patent and Trademark Office and any resulting appeals.

 

In its 2011 Form 10-K, Abbott reported that it is seeking to enforce its patent rights relating to niacin extended release tablets (a drug Abbott sells under the trademark Niaspan®). In a case filed in the United States District Court for the District of Delaware in February 2012, Abbott alleges that Amneal Pharmaceutical’s proposed generic product infringes Abbott’s patents and seeks declaratory and injunctive relief.  In two additional cases, each filed in the United States District Court for the District of Delaware in March 2012, Abbott alleges that Mylan Pharmaceutical’s and Watson Pharmaceutical’s proposed generic products infringe Abbott’s patents and seeks declaratory and injunctive relief.

 

In a case filed in the United States District Court for the District of Delaware in April 2012, Abbott is seeking to enforce its patent rights relating to ritonavir tablets (a drug Abbott sells under the trademark Norvir®).  Abbott alleges that Roxane Laboratories, Inc.’s (Roxane)

 

22



 

proposed generic product infringes five Abbott patents and seeks declaratory and injunctive relief.  Also in April 2012, Roxane filed a declaratory judgment action in the United States District Court for the Southern District of Ohio alleging that two Abbott patents are invalid and not infringed by Roxane’s proposed generic product.  Abbott has filed a motion to dismiss Roxane’s lawsuit or, in the alternative, transfer it to the United States District Court for the District of Delaware.

 

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, 2012 – January 31, 2012

 

248,681

(1)

$

55.758

 

0

 

$

3,392,180,505

(2)

February 1, 2012 – February 29, 2012

 

9,399,428

(1)

$

55.560

 

9,225,000

 

$

2,879,675,328

(2)

March 1, 2012 – March 31, 2012

 

6,588,996

(1)

$

57.981

 

6,150,000

 

$

2,523,824,592

(2)

Total

 

16,237,105

(1)

$

56.545

 

15,375,000

 

$

2,523,824,592

(2)

 


1.     These shares include:

 

(i)             the shares deemed surrendered to Abbott to pay the exercise price in connection with the exercise of employee stock options - 248,681 in January, 151,428 in February, and 415,996 in March; and

 

(ii)          the shares purchased on the open market for the benefit of participants in the Abbott Laboratories, Limited Employee Stock Purchase Plan - 0 in January, 23,000 in February, and 23,000 in March.

 

These shares do not include the shares surrendered to Abbott to satisfy tax withholding obligations in connection with the vesting of restricted stock or restricted stock units.

 

2.               On October 13, 2008, Abbott announced that its board of directors approved the purchase of up to $5 billion of its common shares, from time to time.

 

23



 

Item 6.            Exhibits

 

Incorporated by reference to the Exhibit Index included herewith.

 

24



 

SIGNATURE

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

 

 

 

ABBOTT LABORATORIES

 

 

 

 

 

 

 

By:

/s/ Thomas C. Freyman

 

 

Thomas C. Freyman

 

 

Executive Vice President,

 

 

Finance and Chief Financial Officer

 

 

 

 

 

 

Date: May 8, 2012

 

 

 

25



 

EXHIBIT INDEX

 

Exhibit No.

 

Exhibit

 

 

 

3

 

*By-laws of Abbott Laboratories, as amended and restated, effective as of April 27, 2012, filed as Exhibit 3.1 to the Abbott Laboratories Current Report on Form 8-K dated February 24, 2012.

 

 

 

12

 

Statement re: computation of ratio of earnings to fixed charges.

 

 

 

31.1

 

Certification of Chief Executive Officer Required by Rule 13a-14(a) (17 CFR 240.13a-14(a)).

 

 

 

31.2

 

Certification of Chief Financial Officer Required by Rule 13a-14(a) (17 CFR 240.13a-14(a)).

 

 

 

Exhibits 32.1 and 32.2 are furnished herewith and should not be deemed to be “filed” under the Securities Exchange Act of 1934.

 

 

 

32.1

 

Certification of Chief Executive Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

 

 

 

32.2

 

Certification of Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

 

 

 

101

 

The following financial statements and notes from the Abbott Laboratories Quarterly Report on Form 10-Q for the quarter ended March 31, 2012, filed on May 8, 2012, formatted in XBRL: (i)  Condensed Consolidated Statement of Earnings; (ii) Condensed Consolidated Statement of Cash Flows; (iii) Condensed Consolidated Balance Sheet; and (iv) the notes to the condensed consolidated financial statements.

 


*              Incorporated herein by reference.  Commission file number 1-2189.

 

26


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