Abbott Laboratories (ABT), (founding name: Abbott Alkaloid Company) is a global pharmaceutical company with around 73,000 employees in 150 countries. Abbott was founded in 1888 by Wallace C. Abbott (1857-1921) and is headquartered in Abbott Park, a northern suburb of Chicago, Illinois.
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2012
OR
o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission File No. 1-2189
ABBOTT LABORATORIES
An Illinois Corporation
I.R.S. Employer Identification No.
36-0698440
100 Abbott Park Road
Abbott Park, Illinois 60064-6400
Telephone: (847) 937-6l00
Indicate by check mark whether the registrant: (l) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of l934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 229.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
Large Accelerated Filer x
Accelerated Filer o
Non-Accelerated Filer o
Smaller reporting company o
(Do not check if a smaller reporting company)
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No x
As of September 30, 2012, Abbott Laboratories had 1,580,667,737 common shares without par value outstanding.
PART I. FINANCIAL INFORMATION
Abbott Laboratories and Subsidiaries
Condensed Consolidated Financial Statements
(Unaudited)
Condensed Consolidated Statement of Earnings
(dollars and shares in thousands except per share data)
Three Months Ended
Nine Months Ended
September 30
2012
2011
Net Sales
$
9,773,241
9,816,665
29,036,974
28,473,806
Cost of products sold
3,698,078
3,973,250
11,060,308
11,702,705
Research and development
1,164,187
1,009,627
3,180,751
2,977,807
Acquired in-process and collaborations research and development
—
260,000
272,500
Selling, general and administrative
2,921,923
4,238,910
8,866,723
9,851,314
Total Operating Cost and Expenses
7,784,188
9,221,787
23,367,782
24,804,326
Operating Earnings
1,989,053
594,878
5,669,192
3,669,480
Interest expense
152,034
124,339
406,091
404,055
Interest (income)
(18,255
)
(20,816
(56,153
(61,400
Net foreign exchange loss (gain)
(6,259
(5,018
4,349
(48,180
Other (income) expense, net
(10,851
(5,222
(73,822
130,068
Earnings Before Taxes
1,872,384
501,595
5,388,727
3,244,937
Taxes on Earnings
(70,422
198,414
479,188
135,156
Net Earnings
1,942,806
303,181
4,909,539
3,109,781
Basic Earnings Per Common Share
1.22
0.19
3.09
1.99
Diluted Earnings Per Common Share
1.21
3.06
1.98
Cash Dividends Declared Per Common Share
0.51
0.48
1.53
1.44
Average Number of Common Shares Outstanding Used for Basic Earnings Per Common Share
1,576,771
1,558,556
1,574,466
1,555,482
Dilutive Common Stock Options and Awards
17,508
9,731
16,500
8,617
Average Number of Common Shares Outstanding Plus Dilutive Common Stock Options and Awards
1,594,279
1,568,287
1,590,966
1,564,099
Outstanding Common Stock Options Having No Dilutive Effect
1,720
61,201
1,166
60,653
The accompanying notes to condensed consolidated financial statements are an integral part of this statement.
2
Condensed Consolidated Statement of Comprehensive Income
(dollars thousands)
Foreign currency translation gain (loss) adjustments
820,569
(1,494,495
(174,668
478,793
Amortization of net actuarial losses and prior service cost and credits, net of taxes of $18,865 and $64,770 in 2012 and $14,964 and $44,623 in 2011
32,685
28,250
112,357
80,871
Unrealized (losses) gains on marketable equity securities, net of taxes of $(9,918) and $(4,013) in 2012 and $(4,484) and $1,612 in 2011
(17,353
(7,768
(6,952
2,793
Net adjustments for derivative instruments designated as cash flow hedges, net of taxes of $(12,072) and $(22,367) in 2012 and $8,988 and $(13,972) in 2011
(48,286
35,952
(89,467
(55,888
Other comprehensive income (loss), net of tax
787,615
(1,438,061
(158,730
506,569
Comprehensive Income (Loss)
2,730,421
(1,134,880
4,750,809
3,616,350
Sept. 30 2012
Dec. 31 2011
Supplemental Accumulated Other Comprehensive Income Information, net of tax:
Cumulative foreign currency translation loss adjustments
247,195
72,527
Net actuarial losses and prior service cost and credits
2,618,262
2,730,619
Cumulative unrealized (gains) on marketable equity securities
(31,477
(38,429
Cumulative (gains) on derivative instruments designated as cash flow hedges
(78,065
(167,532
3
Condensed Consolidated Statement of Cash Flows
(dollars in thousands)
Nine Months Ended September 30
Cash Flow From (Used in) Operating Activities:
Net earnings
Adjustments to reconcile earnings to net cash from operating activities -
Depreciation
1,105,441
1,154,198
Amortization of intangibles
1,088,989
1,241,267
Share-based compensation
358,735
320,103
Trade receivables
689,292
272,530
Inventories
(465,470
47,521
Other, net
(135,265
1,150,828
Net Cash From Operating Activities
7,811,261
7,568,728
Cash Flow From (Used in) Investing Activities:
Acquisitions of property and equipment
(1,409,193
(1,216,765
Acquisitions of businesses and technology
(1,202,473
(672,500
Purchases of investment securities, net
(2,246,183
(1,093,548
Release of restricted funds
1,870,000
Other
1,998
9,171
Net Cash (Used in) Investing Activities
(4,855,851
(1,103,642
Cash Flow From (Used in) Financing Activities:
Proceeds from issuance of (repayments of) short-term debt and other
788,358
(786,830
Payment of long-term debt
(54,000
(2,008,836
Purchases of common shares
(1,723,348
(74,428
Proceeds from stock options exercised, including income tax benefit
1,570,411
317,463
Dividends paid
(2,370,937
(2,186,006
Net Cash (Used in) Financing Activities
(1,789,516
(4,738,637
Effect of exchange rate changes on cash and cash equivalents
18,234
(325,521
Net Increase in Cash and Cash Equivalents
1,184,128
1,400,928
Cash and Cash Equivalents, Beginning of Year
6,812,820
3,648,371
Cash and Cash Equivalents, End of Period
7,996,948
5,049,299
4
Condensed Consolidated Balance Sheet
September 30 2012
December 31 2011
Assets
Current Assets:
Cash and cash equivalents
Investments, primarily time deposits and certificates of deposit
3,507,574
1,284,539
Trade receivables, less allowances of $417,371 in 2012 and $420,579 in 2011
6,948,714
7,683,920
Inventories:
Finished products
2,500,368
2,220,527
Work in process
530,464
432,358
Materials
783,424
631,364
Total inventories
3,814,256
3,284,249
Prepaid expenses, deferred income taxes, and other receivables
4,996,752
4,703,246
Total Current Assets
27,264,244
23,768,774
Investments
380,383
378,225
Property and Equipment, at Cost
18,629,832
18,016,565
Less: accumulated depreciation and amortization
10,669,184
10,142,610
Net Property and Equipment
7,960,648
7,873,955
Intangible Assets, net of amortization
8,959,751
9,989,636
Goodwill
15,708,924
15,705,380
Deferred Income Taxes and Other Assets
2,983,788
2,560,923
63,257,738
60,276,893
Liabilities and Shareholders’ Investment
Current Liabilities:
Short-term borrowings
3,206,147
2,347,859
Trade accounts payable
1,605,202
1,721,127
Salaries, wages and commissions
1,395,860
1,260,121
Other accrued liabilities
7,542,305
7,854,994
Dividends payable
808,256
754,284
Income taxes payable
709,364
514,947
Current portion of long-term debt
1,018,844
1,026,896
Total Current Liabilities
16,285,978
15,480,228
Long-term Debt
12,054,640
12,039,822
Post-employment Obligations, Deferred Income Taxes and Other Long-term Liabilities
7,812,779
8,230,698
Commitments and Contingencies
Shareholders’ Investment:
Preferred shares, one dollar par value Authorized — 1,000,000 shares, none issued
Common shares, without par value Authorized - 2,400,000,000 shares Issued at stated capital amount - Shares: 2012: 1,670,540,288; 2011: 1,638,870,201
11,418,613
9,817,134
Common shares held in treasury, at cost - Shares: 2012: 89,872,551; 2011: 68,491,382
(4,975,279
(3,687,478
Earnings employed in the business
23,326,756
20,907,362
Accumulated other comprehensive income (loss)
(2,755,915
(2,597,185
Total Abbott Shareholders’ Investment
27,014,175
24,439,833
Noncontrolling Interests in Subsidiaries
90,166
86,312
Total Shareholders’ Investment
27,104,341
24,526,145
5
Notes to Condensed Consolidated Financial Statements
September 30, 2012
Note 1 — Basis of Presentation
The accompanying unaudited, condensed consolidated financial statements have been prepared pursuant to rules and regulations of the Securities and Exchange Commission and, therefore, do not include all information and footnote disclosures normally included in audited financial statements. However, in the opinion of management, all adjustments (which include only normal adjustments) necessary to present fairly the results of operations, financial position and cash flows have been made. It is suggested that these statements be read in conjunction with the financial statements included in Abbott’s Annual Report on Form 10-K for the year ended December 31, 2011. The consolidated financial statements include the accounts of the parent company and subsidiaries, after elimination of intercompany transactions.
Effective January 1, 2011, the one month lag in the consolidation of the accounts of foreign subsidiaries was eliminated and the year-end of foreign subsidiaries was changed to December 31. In accordance with applicable accounting literature, a change in subsidiaries’ year-end is treated as a change in accounting principle and requires retrospective application. The impact of the change was not material to the results of operations for the previously reported annual and interim periods after January 1, 2009, and thus, those results have not been revised. A charge of $137 million was recorded to Other (income) expense, net in the first three months of 2011 to recognize the cumulative immaterial impacts to 2009 and 2010.
Note 2 — Supplemental Financial Information
Unvested restricted stock that contain non-forfeitable rights to dividends are treated as participating securities and are included in the computation of earnings per share under the two-class method. Under the two-class method, net earnings are allocated between common shares and participating securities. Net earnings allocated to common shares for the three months and nine months ended September 30, 2012 were $1.928 billion and $4.871 billion, respectively, and net earnings allocated to common shares for the three months and nine months ended September 30, 2011 were $302 million and $3.102 billion, respectively.
Other (income) expense, net, for the nine months ended September 30, 2012 includes income of approximately $60 million from the resolution of a contractual agreement. Other, net in Net cash from operating activities for 2012 includes payments of approximately $800 million to settle certain government investigations and the recognition of $386 million of tax benefits in the third quarter as a result of the favorable resolution of various tax positions pertaining to a prior year. These items were partially offset by increases in other accrued liabilities, primarily related to restructuring activities and the timing of various payments. Other, net in Net cash from operating activities for 2011 includes the non-cash impact of a litigation accrual of $1.5 billion which was partially offset by $570 million of tax benefits related to the favorable resolution of various tax positions pertaining to prior years. Other, net in Net cash from operating activities for 2012 and 2011 includes the effects of contributions to defined benefit plans of $360 million and $390 million, respectively.
The judgment entered by the U.S. District Court for the Eastern District of Texas against Abbott in its litigation with New York University and Centocor, Inc. required Abbott to secure the judgment in the event that its appeal to the Federal Circuit court was unsuccessful in overturning the district court’s decision. In the first quarter of 2010, Abbott deposited $1.87 billion with an escrow agent and considered these assets to be restricted. On February 23, 2011, the Federal Circuit reversed the district court’s final judgment and found Centocor’s patent invalid. In June 2011, the Federal Circuit denied Centocor’s petition to rehear or reconsider the decision and the restrictions on the funds were lifted.
The components of long-term investments as of September 30, 2012 and December 31, 2011 are as follows:
December 31
(dollars in millions)
Equity securities
319
317
61
Total
380
378
6
(Unaudited), continued
Note 3 — Taxes on Earnings
Taxes on earnings reflect the estimated annual effective rates and include charges for interest and penalties. Taxes on earnings in 2012 reflect the recognition of $386 million of tax benefits in the third quarter as a result of the favorable resolution of various tax positions pertaining to a prior year, which also decreased the gross amount of unrecognized tax benefits by approximately $540 million. Taxes on earnings in 2011 reflect the effect of the tax rate applied to a litigation reserve in the third quarter and the recognition of $570 million of tax benefits as a result of the favorable resolution of various tax positions pertaining to prior years, which also decreased the gross amount of unrecognized tax benefits by approximately $1.2 billion. Exclusive of these discrete items, the effective tax rates are less than the statutory U.S. federal income tax rate principally due to the benefit of lower statutory tax rates and tax exemptions in several foreign taxing jurisdictions.
Note 4 — Litigation and Environmental Matters
Abbott has been identified as a potentially responsible party for investigation and cleanup costs at a number of locations in the United States and Puerto Rico under federal and state remediation laws and is investigating potential contamination at a number of company-owned locations. Abbott has recorded an estimated cleanup cost for each site for which management believes Abbott has a probable loss exposure. No individual site cleanup exposure is expected to exceed $4 million, and the aggregate cleanup exposure is not expected to exceed $15 million.
There are a number of patent disputes with third parties who claim Abbott’s products infringe their patents. On February 21, 2012, the United States Supreme Court denied Centocor Inc.’s and New York University’s petition to review a February 2011 Federal Circuit Court of Appeals decision reversing a $1.67 billion judgment in favor of Centocor and New York University on a patent they claimed Abbott’s HUMIRA infringed. This decision concludes the case.
The United States Department of Justice, through the United States Attorney for the Western District of Virginia, and various state Attorneys General investigated Abbott’s sales and marketing activities for Depakote. The government sought to determine whether any of these activities violated civil and/or criminal laws, including the Federal False Claims Act, the Food, Drug and Cosmetic Act, and the Anti-Kickback Statute in connection with Medicare and/or Medicaid reimbursement to third parties. The state Attorneys General offices sought to determine whether any of these activities violated various state laws, including state consumer fraud/protection statutes. Abbott recorded charges of $1.5 billion in the third quarter of 2011 and $100 million in the first quarter of 2012 related to civil and criminal claims arising from this matter. In May 2012, Abbott reached resolution of all Depakote-related federal claims, Medicaid-related claims with 49 states and the District of Columbia, and consumer protection claims with 45 states and the District of Columbia. In the second quarter of 2012, Abbott paid approximately $800 million of the settlement and the remainder was paid in October 2012. The payments are material to Abbott’s cash flows in 2012.
Excluding the settlement of Depakote-related claims, Abbott estimates the range of possible loss for its other legal proceedings and environmental exposures to be from approximately $90 million to $115 million. The recorded accrual balance at September 30, 2012 for these other proceedings and exposures was approximately $95 million. This accrual represents management’s best estimate of probable loss, as defined by FASB ASC No. 450, “Contingencies.” Within the next year, legal proceedings may occur that may result in a change in the estimated loss accrued by Abbott. While it is not feasible to predict the outcome of all such proceedings and exposures with certainty, management believes that their ultimate disposition should not have a material adverse effect on Abbott’s financial position, cash flows, or results of operations.
7
Note 5 — Post-Employment Benefits
Retirement plans consist of defined benefit, defined contribution, and medical and dental plans. Net cost for the three and nine months ended September 30 for Abbott’s major defined benefit plans and post-employment medical and dental benefit plans is as follows:
Defined Benefit Plans
Medical and Dental Plans
Three Months
Nine Months
Ended Sept. 30
Service cost — benefits earned during the period
92
95
285
251
16
14
45
41
Interest cost on projected benefit obligations
114
131
340
350
20
22
66
Expected return on plans’ assets
(153
(171
(460
(471
(8
(9
(25
Settlement
36
Net amortization
55
43
180
125
(3
(1
(6
Net Cost
108
134
345
291
25
26
75
79
Abbott funds its domestic defined benefit plans according to IRS funding limitations. International pension plans are funded according to similar regulations. In the first nine months of 2012 and 2011, $360 million and $390 million, respectively, was contributed to defined benefit plans and $40 million was contributed to the post-employment medical and dental benefit plans in each period.
Note 6 — Segment Information
Abbott’s principal business is the discovery, development, manufacture and sale of a broad line of health care products. Abbott’s products are generally sold directly to retailers, wholesalers, hospitals, health care facilities, laboratories, physicians’ offices and government agencies throughout the world. Effective January 1, 2012, certain international operations were transferred from the Established Pharmaceutical Products segment to the Proprietary Pharmaceutical Products segment. The segment information below has been adjusted to reflect this reorganization. Abbott’s reportable segments are as follows:
Proprietary Pharmaceutical Products — Worldwide sales of a broad line of proprietary pharmaceutical products.
Established Pharmaceutical Products — International sales of a broad line of branded generic pharmaceutical products.
Nutritional Products — Worldwide sales of a broad line of adult and pediatric nutritional products.
Diagnostic Products — Worldwide sales of diagnostic systems and tests for blood banks, hospitals, commercial laboratories and alternate-care testing sites. For segment reporting purposes, the Core Laboratories Diagnostics, Molecular Diagnostics, Point of Care and Ibis diagnostic divisions are aggregated and reported as the Diagnostic Products segment.
Vascular Products — Worldwide sales of coronary, endovascular, structural heart, vessel closure and other medical device products.
Non-reportable segments include the Diabetes Care and Medical Optics segments.
Abbott’s underlying accounting records are maintained on a legal entity basis for government and public reporting requirements. Segment disclosures are on a performance basis consistent with internal management reporting. Intersegment transfers of inventory are recorded at standard cost and are not a measure of segment operating earnings. The cost of some corporate functions and the cost of certain employee benefits are charged to segments at predetermined rates that approximate cost. Remaining costs, if any, are not allocated to segments. For acquisitions prior to 2006, substantially all intangible assets and related amortization are not allocated to segments. In addition, no intangible assets or related amortization are allocated to the Established Pharmaceutical Products segment. The following segment information has been prepared in accordance with the internal accounting policies of Abbott, as described above, and are not presented in accordance with generally accepted accounting principles applied to the consolidated financial statements.
8
Net Sales to External Customers
Proprietary Pharmaceutical Products
4,418
4,315
12,870
12,290
2,106
1,893
5,594
4,959
Established Pharmaceutical Products
1,272
1,372
3,775
3,975
297
913
893
Nutritional Products
1,605
1,537
4,755
4,450
244
205
720
540
Diagnostic Products
1,042
1,025
3,162
3,046
201
199
623
555
Vascular Products
743
828
2,312
2,507
219
257
672
700
Total Reportable Segments
9,080
9,077
26,874
26,268
3,120
2,851
8,522
7,647
693
740
2,163
2,206
9,773
9,817
29,037
28,474
Corporate functions and benefit plans costs
(148
(108
(456
(344
Non-reportable segments
56
39
287
173
Net interest expense
(134
(104
(350
(343
(260
(273
Share-based compensation (a)
(76
(68
(359
(320
Other, net (b)
(946
(2,108
(1,995
(3,295
Consolidated Earnings Before Taxes
1,872
502
5,389
3,245
(a) Approximately 40 to 45 percent of the annual net cost of share-based awards will typically be recognized in the first quarter due to the timing of the granting of share-based awards.
(b) Other, net for the third quarter and nine months 2011 includes a charge of $1.5 billion related to a government investigation.
Note 7 — Incentive Stock Programs
In the first nine months of 2012, Abbott granted 1,931,213 stock options, 1,965,362 replacement stock options, 1,000,925 restricted stock awards and 6,790,557 restricted stock units under these programs. At September 30, 2012, approximately 155 million shares were reserved for future grants. Information regarding the number of options outstanding and exercisable at September 30, 2012 is as follows:
Outstanding
Exercisable
Number of shares
53,760,658
48,509,411
Weighted average remaining life (years)
4.1
3.8
Weighted average exercise price
51.70
51.13
Aggregate intrinsic value (in millions)
928
867
The total unrecognized share-based compensation cost at September 30, 2012 amounted to approximately $330 million which is expected to be recognized over the next three years.
9
Note 8 — Business Combinations and Technology Acquisitions
In the second quarter of 2012, Abbott recorded a charge to acquired in-process and collaborations research and development of $110 million as a result of the acquisition of AP214, a drug under development for the prevention of acute kidney injury associated with major cardiac surgery in patients at increased risk. In the first quarter of 2012, Abbott recorded a charge to acquired in-process and collaborations research and development of $150 million as a result of entering into a global collaboration to develop and commercialize an oral, next-generation JAK1 inhibitor in Phase II development with the potential to treat multiple autoimmune diseases. Additional payments of approximately $1.2 billion could be required for the achievement of certain development, regulatory and commercial milestones under this agreement. In the fourth quarter of 2011, Abbott entered into a collaboration, with Reata on a worldwide basis, for the joint development and commercialization of second-generation oral antioxidant inflammation modulators resulting in a charge to acquired in-process and collaborations research and development of $400 million which was paid in the first quarter of 2012. In connection with the acquisition of Solvay Pharmaceuticals, the achievement of a certain sales milestone resulted in a payment of approximately $134 million in the first quarter of 2012 for which a liability was previously established.
In 2010, Abbott entered into an agreement to acquire licensing rights outside the U.S., excluding certain Asian markets, to a product in development for the treatment of chronic kidney disease. In the first and second quarters of 2011, certain milestones were achieved and charges to acquired in-process and collaborations research and development of $100 million and $88 million were recorded. In the first quarter of 2012, $50 million of research and development expense was recorded related to the achievement of a clinical development milestone under this agreement. In addition, in the second quarter of 2011, Abbott entered into an agreement to develop and commercialize a treatment of rheumatoid arthritis and psoriasis resulting in a charge to acquired in-process and collaborations research and development of $85 million.
Note 9 — Financial Instruments, Derivatives and Fair Value Measures
Certain Abbott foreign subsidiaries enter into foreign currency forward exchange contracts to manage exposures to changes in foreign exchange rates for anticipated intercompany purchases by those subsidiaries whose functional currencies are not the U.S. dollar. These contracts, totaling $414 million and $1.6 billion at September 30, 2012 and December 31, 2011, respectively, are designated as cash flow hedges of the variability of the cash flows due to changes in foreign exchange rates and are recorded at fair value. Accumulated gains and losses as of September 30, 2012 will be included in Cost of products sold at the time the products are sold, generally through the next twelve months. The amount of hedge ineffectiveness was not significant in 2012 and 2011.
Abbott enters into foreign currency forward exchange contracts to manage currency exposures for foreign currency denominated third-party trade payables and receivables, and for intercompany loans and trade accounts payable where the receivable or payable is denominated in a currency other than the functional currency of the entity. For intercompany loans, the contracts require Abbott to sell or buy foreign currencies, primarily European currencies and Japanese yen, in exchange for primarily U.S. dollars and other European currencies. For intercompany and trade payables and receivables, the currency exposures are primarily the U.S. dollar, European currencies and Japanese yen. At September 30, 2012 and December 31, 2011, Abbott held $18.8 billion and $15.7 billion, respectively, of such foreign currency forward exchange contracts.
Abbott has designated foreign denominated short-term debt as a hedge of the net investment in a foreign subsidiary of approximately $685 million and approximately $680 million as of September 30, 2012 and December 31, 2011, respectively. Accordingly, changes in the fair value of this debt due to changes in exchange rates are recorded in Accumulated other comprehensive income (loss), net of tax.
Abbott is a party to interest rate swap contracts totaling $6.8 billion at September 30, 2012 and at December 31, 2011 to manage its exposure to changes in the fair value of fixed-rate debt. These contracts are designated as fair value hedges of the variability of the fair value of fixed-rate debt due to changes in the long-term benchmark interest rates. The effect of the hedge is to change a fixed-rate interest obligation to a variable rate for that portion of the debt. Abbott records the contracts at fair value and adjusts the carrying amount of the fixed-rate debt by an offsetting amount. No hedge ineffectiveness was recorded in income in 2012 or 2011 for these hedges.
10
The following table summarizes the amounts and location of certain derivative financial instruments as of September 30, 2012 and December 31, 2011:
Fair Value - Assets
Fair Value - Liabilities
Balance Sheet Caption
Interest rate swaps designated as fair value hedges
759
598
Deferred income taxes and other assets
n/a
Foreign currency forward exchange contracts —
Hedging instruments
115
Prepaid expenses,
Others not designated as hedges
124
165
deferred income taxes, and other receivables
179
Debt designated as a hedge of net investment in a foreign subsidiary
685
680
890
878
861
The following table summarizes the activity for foreign currency forward exchange contracts designated as cash flow hedges, debt designated as a hedge of net investment in a foreign subsidiary and the amounts and location of income (expense) and gain (loss) reclassified into income in the third quarter and first nine months of 2012 and 2011 and for certain other derivative financial instruments. The amount of hedge ineffectiveness was not significant in 2012 and 2011 for these hedges.
Gain (loss) Recognized in Other Comprehensive Income (loss)
Income (expense) and Gain (loss) Reclassified into Income
Three Months Ended Sept. 30
Nine Months Ended Sept. 30
Income Statement
Caption
Foreign currency forward exchange contracts designated as cash flow hedges
(22
(12
(98
(29
91
(15
(30
(5
(40
78
415
161
506
Foreign currency forward exchange contracts not designated as hedges
11
60
128
The interest rate swaps are designated as fair value hedges of the variability of the fair value of fixed-rate debt due to changes in the long-term benchmark interest rates. The hedged debt is marked to market, offsetting the effect of marking the interest rate swaps to market.
The carrying values and fair values of certain financial instruments as of September 30, 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.
Carrying Value
Fair Value
Long-term Investment Securities:
50
42
Total Long-term Debt
(13,073
(15,555
(13,067
(15,129
Foreign Currency Forward Exchange Contracts:
Receivable position
280
(Payable) position
(182
(181
Interest Rate Hedge Contracts
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
Outstanding Balances
Quoted Prices in Active Markets
Significant Other Observable Inputs
Significant Unobservable Inputs
September 30, 2012:
77
Interest rate swap derivative financial instruments
Foreign currency forward exchange contracts
Total Assets
967
Fair value of hedged long-term debt
7,495
182
Contingent consideration related to business combinations
313
Total Liabilities
7,990
7,677
December 31, 2011:
93
971
7,427
181
423
8,031
7,608
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
Note 10 — Goodwill and Intangible Assets
Foreign currency translation adjustments increased goodwill in the first nine months of 2011 by approximately $300 million, while there were no significant changes in 2012. The amount of goodwill related to reportable segments at September 30, 2012 was $6.2 billion for the Proprietary Pharmaceutical Products segment, $3.0 billion for the Established Pharmaceutical Products segment, $209 million for the Nutritional Products segment, $385 million for the Diagnostic Products segment, and $2.6 billion for the Vascular Products segment. There were no reductions of goodwill relating to impairments or disposal of all or a portion of a business.
The gross amount of amortizable intangible assets, primarily product rights and technology was $17.6 billion as of September 30, 2012 and $17.5 billion as of December 31, 2011, and accumulated amortization was $9.4 billion as of September 30, 2012 and $8.3 billion as of December 31, 2011. Indefinite-lived intangible assets, which relate to in-process research and development acquired in a business combination, was approximately $764 million at September 30, 2012 and $814 million at December 31, 2011. The estimated annual amortization expense for intangible assets is approximately $1.5 billion in 2012, $1.3 billion in 2013, $1.0 billion in 2014, $861 million in 2015 and $745 million in 2016. Intangible asset amortization is included in Cost of products sold in the condensed consolidated statement of earnings. Amortizable intangible assets are amortized over 2 to 30 years (average 11 years).
Note 11 — Restructuring Plans
In the third quarter 2012, Abbott management approved plans to streamline various commercial operations in order to reduce costs and improve efficiencies in Abbott’s core diagnostics, established pharmaceutical and nutritionals businesses. Abbott recorded employee related severance charges of approximately $167 million in the third quarter 2012. Additional charges of approximately $22 million were also recorded in the third quarter 2012, primarily for asset impairments. Approximately $70 million is recorded in Cost of products sold and approximately $119 million as Selling, general and administrative expense. As of September 30, 2012, no significant cash payments have been made relating to these actions.
In 2011 and prior years, Abbott management approved plans to realign its worldwide pharmaceutical and vascular manufacturing operations and selected domestic and international commercial and research and development operations in order to reduce costs. In the first three months of 2011, Abbott recorded $49 million to Cost of products sold, $18 million to Research and development and $49 million to Selling, general and administrative. The following summarizes the activity for these restructurings: (dollars in millions)
Accrued balance at January 1
177
Restructuring charges
116
Payments and other adjustments
(19
(71
Accrued balance at September 30
158
122
Additional charges of $83 million and $12 million were recorded in the first nine months of 2012 and 2011, respectively, relating to these restructurings, primarily for accelerated depreciation.
In 2012 and 2010, Abbott management approved restructuring plans primarily related to the acquisition of Solvay Pharmaceuticals. These plans streamline operations, improve efficiencies and reduce costs in certain Solvay sites and functions as well as in certain Abbott and Solvay commercial organizations in various countries. In the third quarter 2012, Abbott recorded a charge of approximately $150 million for employee severance and contractual obligations, primarily related to the exit from a research and development facility. Approximately $142 million is recorded as Research and development and $8 million as Selling, general and administrative. The following summarizes the activity for these restructurings: (dollars in millions)
410
150
(179
231
13
Additional charges of approximately $29 million and $95 million were recorded in the first nine months of 2012 and 2011, respectively, relating to this restructuring, primarily for accelerated depreciation, asset impairment and employee severance.
In 2011 and 2008, Abbott management approved a plan to streamline global manufacturing operations, reduce overall costs, and improve efficiencies in Abbott’s core diagnostic business. A charge of $31 million was recorded in Cost of products sold for the 2011 restructuring. The following summarizes the activity for this restructuring: (dollars in millions)
88
31
(27
57
Additional charges of approximately $12 million and $28 million were recorded in the first nine months of 2012 and 2011, respectively, relating to this restructuring, primarily for accelerated depreciation and product transfer costs. Additional charges will occur through 2012 as a result of product re-registration timelines required under manufacturing regulations in a number of countries and product transition timelines.
Note 12 — Separation of Abbott’s Proprietary Pharmaceuticals Business
In October 2011, Abbott announced a plan to separate into two publicly traded companies, one in diversified medical products and the other in research-based pharmaceuticals. To accomplish the separation, Abbott plans to create a new company for its research-based pharmaceuticals business which will include Abbott’s Proprietary Pharmaceutical Products segment. The transaction is expected to take the form of a tax-free distribution to Abbott shareholders of the stock of the newly created research-based pharmaceutical company. Abbott expects to be ready to separate the company on January 1, 2013 subject to obtaining the required approvals. Subsequent to the separation, the historical results of the research-based pharmaceuticals business will be presented as discontinued operations. Annual net sales for the new research-based pharmaceuticals business were approximately $17.4 billion in 2011.
Note 13 — Subsequent Event
On October 17, 2012, Reata Pharmaceuticals informed Abbott that it is discontinuing the Phase III clinical study, known as BEACON, designed to evaluate bardoxolone methyl in diabetic patients with advanced chronic kidney disease. The discontinuation is based on a recommendation from the study’s Independent Data Monitoring Committee regarding safety concerns due to “excess serious adverse events and mortality in the bardoxolone methyl arm.” Reata and Abbott will closely examine the data from this study to determine whether there is an appropriate path forward for the development of bardoxolone methyl in chronic kidney disease or other indications. Abbott has the rights to bardoxolone methyl outside the U.S., excluding certain Asian markets. At September 30, 2012, Abbott holds a $124 million equity investment in Reata and is evaluating the impact of this event on the carrying value of the investment.
FINANCIAL REVIEW
Results of Operations
The following table details sales by reportable segment for the three months and nine months ended September 30. Percent changes are versus the prior year and are based on unrounded numbers.
Three Months Ended September 30
Percent Change
2.4
13.4
4.7
12.8
(7.3
23.0
(5.0
31.8
4.5
12.6
6.9
8.6
1.6
11.9
9.6
(10.2
(7.8
5.7
13.6
2.3
(6.4
8.3
(1.9
8.4
(0.4
13.2
2.0
13.0
Total U.S.
4,214
3.1
4,088
5.8
12,115
5.0
11,543
Total International
5,559
(3.0
5,729
19.1
16,922
(0.1
16,931
18.5
The net sales growth for the third quarter and first nine months of 2012 reflects unit growth, partially offset by unfavorable exchange. Excluding 4.5 percent and 3.6 percent of unfavorable exchange for the third quarter and first nine months of 2012, net sales increased 4.1 percent and 5.6 percent, respectively. The relatively stronger U.S. dollar decreased third quarter 2012 Total International sales by 7.7 percent, decreased Proprietary Pharmaceutical Products segment sales by 4.0 percent, decreased Established Pharmaceutical Products segment sales by 9.6 percent, decreased Nutritional Product segment sales by 1.8 percent, decreased Diagnostic Products segment sales by 5.0 percent and decreased Vascular Products segment sales by 3.9 percent over the third quarter of 2011. The relatively stronger U.S. dollar decreased the first nine months 2012 Total International sales by 6.0 percent, decreased Proprietary Pharmaceutical Products segment sales by 3.3 percent, decreased Established Pharmaceutical Products segment sales by 7.7 percent, decreased Nutritional Product segment sales by 1.4 percent, decreased Diagnostic Products segment sales by 3.8 percent and decreased Vascular Products segment sales by 2.6 percent over the first nine months of 2011. In addition to unfavorable exchange, the decrease in 2012 Vascular Products sales is due to the winding down of royalty and supply agreements related to certain third-party products, including Promus. Excluding this royalty and supply agreement revenue in both periods and the unfavorable effect of exchange, Vascular Products sales increased 3.9 percent and 4.3 percent in the third quarter and first nine months of 2012, respectively.
The net sales growth for the third quarter and first nine months of 2011 reflects unit growth, the acquisition of Piramal Healthcare Limited’s Healthcare Solution business in September 2010 and the effect of exchange. The net sales growth for the first nine months of 2011 also reflects the acquisition of Solvay’s pharmaceuticals business in February 2010. Excluding 5.3 percent and 3.8 percent of favorable exchange for the third quarter and first nine months of 2011, net sales increased 7.9 percent and 9.2 percent, respectively. The relatively weaker U.S. dollar increased third quarter 2011 Total International sales by 9.5 percent, increased Proprietary Pharmaceutical Products segment sales by 4.6 percent, increased Established Pharmaceutical Products segment sales by 9.5 percent, increased Nutritional Product segment sales by 3.1 percent, increased Diagnostic Products segment sales by 6.5 percent and increased Vascular Products segment sales by 5.3 percent over the third quarter of 2010. The relatively weaker U.S. dollar increased the first nine months 2011 Total International sales by 6.7 percent, increased Proprietary Pharmaceutical Products segment sales by 3.2 percent, increased Established Pharmaceutical Products segment sales by 7.1 percent, increased Nutritional Product segment sales by 2.7 percent, increased Diagnostic Products segment sales by 4.6 percent and increased Vascular Products segment sales by 3.8 percent over the first nine months of 2010. Sales growth in the Proprietary Pharmaceutical Products segment was impacted by the acquisition of Solvay Pharmaceuticals in February 2010. Sales growth in the Established Pharmaceutical Products segment and in Total International sales was impacted by the acquisition of Solvay Pharmaceuticals in February 2010 and Piramal Healthcare Limited’s Healthcare solutions business in September 2010.
15
(continued)
A comparison of significant product group sales for the nine months ended September 30 is as follows. Percent changes are versus the prior year and are based on unrounded numbers.
Proprietary Pharmaceuticals —
Total U.S. Proprietary sales
7,138
6,648
HUMIRA
2,964
2,349
18
TRILIPIX/TriCor
897
(7
963
Niaspan
634
718
AndroGel
787
28
615
Lupron
414
401
Synthroid
383
387
21
Kaletra
196
(13
226
(11
Total International Proprietary sales
5,732
5,642
17
3,621
3,405
27
Synagis
463
(2
567
(14
656
175
Total Established Pharmaceutical Products sales —
32
Clarithromycin
355
TriCor and Lipanthyl (fenofibrate)
224
237
n/m
Creon
223
1
222
Serc
153
(16
Duphaston
170
Nutritionals —
U.S. Pediatric Nutritionals
1,079
931
International Pediatric Nutritionals
1,499
1,420
U.S. Adult Nutritionals
1,075
1,030
International Adult Nutritionals
1,093
1,055
Diagnostics —
Immunochemistry
2,429
2,331
Vascular Products (1) —
Xience
1,199
1,160
Other Coronary Products
448
454
Endovascular
338
339
n/m — Percent change is not meaningful
(1) Other Coronary Products include primarily guidewires and balloon catheters. Endovascular includes vessel closure, carotid stents and other peripheral products.
Excluding the negative effect of exchange, Total International Proprietary sales increased 8.7 percent in 2012. In Proprietary Phamaceuticals, a generic version of TriCor is expected to enter the U.S. market in the fourth quarter of 2012. As a result, sales for Abbott’s combined lipid franchise including TriCor, TRILIPIX, Niaspan and Simcor are expected to total less than $1 billion in 2013. Total Established Pharmaceutical Products sales decreased in 2012 due to the negative effect of exchange and decreased sales of Clarithromycin and Serc due to, in part, pricing pressures in Europe, partially offset by growth in emerging markets. Excluding the effect of exchange, Total Established Pharmaceutical Products sales increased 2.7 percent. U.S. Pediatric Nutritional sales in 2012 reflect market share gains for Similac and unit growth for PediaSure while 2011 sales were affected by the voluntary recall of certain Similac-brand powder infant formulas, primarily in the U.S. in September 2010. The increase in 2012 U.S. Adult Nutritional sales reflects unit growth for the Ensure and Glucerna products. International Pediatric and International Adult Nutritionals sales increased in 2012 and 2011 due primarily to volume growth in developing countries. The relatively weaker U.S. dollar increased International Pediatric sales and International Adult Nutritional sales in 2011 by 4.2 percent and 6.2 percent,
respectively. In addition to the product increases listed above, the 2011 growth in U.S. Proprietary product sales is due to the acquisition of Solvay Pharmaceuticals in February 2010.
The gross profit margin was 62.2 percent for the third quarter of 2012 compared to 59.5 percent in 2011. First nine months 2012 gross profit margin was 61.9 percent compared to 58.9 percent for the first nine months 2011. Gross profit margins in 2012 were impacted by improved gross margins across all reportable segments as a result of cost reduction initiatives, the impact of exchange and favorable product mix.
Research and development expenses increased 15.3 percent in the third quarter 2012 and 6.8 percent for the first nine months 2012 over comparable 2011 periods. These increases reflect primarily restructuring charges recorded in the third quarter of 2012. Excluding any restructuring charges in both periods, research and development expenses for the third quarter and first nine months 2012 increased 0.3 percent and 5.4 percent, respectively, over comparable 2011 periods. These increases reflect continued pipeline spending, including programs in biologics, hepatitis C and diagnostics. The majority of research and development expenditures are concentrated on pharmaceutical products. $2.2 billion of Abbott’s research and development expenses for the nine months ended September 30, 2012 related to Abbott’s pharmaceutical products, of which $1.7 billion was directly allocated to the Proprietary Pharmaceutical Products segment. For the first nine months ended September 30, 2012, research and development expenditures totaled $279 million for the Vascular Products segment, $271 million for the Diagnostics Products segment, $201 million for the Established Pharmaceutical Products segment and $133 million for the Nutritional Products segment.
Selling, general and administrative expenses for the third quarter and first nine months of 2011 include a litigation charge of $1.5 billion related to the government investigation related to Depakote. In addition, Selling, general and administrative expenses in both years include charges for restructuring and integration activities and 2012 includes separation expenses. Excluding the effect of these items, Selling, general and administrative expenses for the third quarter and first nine months 2012 increased 0.8 percent and 4.3 percent, respectively, over the comparable 2011 periods. The increases reflect increased selling and marketing support for new and existing products, including spending for HUMIRA and inflation.
Business Combinations and Technology Acquisitions
In 2010, Abbott entered into an agreement to acquire licensing rights outside the U.S., excluding certain Asian markets, to a product in development for the treatment of chronic kidney disease. In the first and second quarters of 2011, certain milestones were achieved and charges to acquired in-process and collaborations research and development of $100 million and $88 million were recorded. In the first quarter of 2012, $50 million of research and development expense was recorded related to the achievement of a clinical development milestone under this agreement. In addition, in the second quarter of 2011, Abbott entered into an agreement to
develop and commercialize a treatment of rheumatoid arthritis and psoriasis resulting in a charge to acquired in-process and collaborations research and development of $85 million.
Restructuring Plans
In 2012 and 2010, Abbott management approved restructuring plans primarily related to the acquisition of Solvay Pharmaceuticals. These plans streamline operations, improve efficiencies and reduce costs in certain Solvay sites and functions as well as in certain Abbott and Solvay commercial organizations in various countries. In the third quarter 2012, Abbott recorded a charge of approximately $150 million for employee severance and contractual obligations, primarily related to the exit from a research and development facility. Approximately $142 million is recorded as Research and development and $8 million as Selling, general and administrative. The following summarizes the activity for these restructuring: (dollars in millions)
Additional charges of approximately $29 million and $95 million were recorded in the first nine months of 2012 and 2011, respectively, relating to this restructuring, primarily for accelerated depreciation, asset impairments and employee severance.
In 2011 and 2008, Abbott management approved a plan to streamline global manufacturing operations, reduce overall costs, and improve efficiencies in Abbott’s core diagnostic business. A charge of $31 million was recorded in Cost of products sold for the 2011 restructuring. The following summarizes the activity for these restructurings: (dollars in millions)
Interest Expense (Income)
Interest expense increased in the third quarter 2012 compared to 2011 due to the amortization of a bridge facility fee, as discussed below. For the nine months ended September 30, 2012, this amortization was partially offset by the impact of lower interest rates.
Effective January 1, 2011, the one month lag in the consolidation of the accounts of foreign subsidiaries was eliminated and the year-end of foreign subsidiaries was changed to December 31. In accordance with applicable accounting literature, a change in subsidiaries’ year-end is treated as a change in accounting principle and requires retrospective application. The impact of the change was not material to the results of operations for the previously reported annual and interim periods after January 1, 2009, and thus, those results have not been revised. A charge of $137 million was recorded to Other (income) expense, net in the first three months of 2011 to recognize the cumulative immaterial impacts to 2009 and 2010. Other (income) expense, net, for the nine months ended September 30, 2012 includes income of approximately $60 million from the resolution of a contractual agreement.
Liquidity and Capital Resources September 30, 2012 Compared with December 31, 2011
Net cash from operating activities for the first nine months 2012 totaled approximately $7.8 billion. Other, net in Net cash from operating activities for 2012 includes payments of approximately $800 million to settle certain government investigations and the recognition of $386 million of tax benefits in the third quarter as a result of the favorable resolution of various tax positions pertaining to a prior year. These items were partially offset by increases in other accrued liabilities, primarily related to restructuring activities and the timing of various payments. Other, net in Net cash from operating activities for 2011 includes the non-cash impact of a litigation accrual of $1.5 billion which was partially offset by $570 million of tax benefits related to the favorable resolution of various tax positions pertaining to prior years. Other, net in Net cash from operating activities for 2012 and 2011 includes the effects of contributions to defined benefit plans of $360 million and $390 million, respectively, and to the post-employment medical and dental benefit plans of $40 million in each period.
The United States Department of Justice, through the United States Attorney for the Western District of Virginia, and various state Attorneys General investigated Abbott’s sales and marketing activities for Depakote. Abbott recorded non-cash charges of $1.5 billion in the third quarter of 2011 and $100 million in the first quarter of 2012. In May 2012, Abbott reached resolution of all of the Depakote-related federal claims, Medicaid-related claims with 49 states and the District of Columbia, and consumer protection claims with 45 states and the District of Columbia. In addition to the payments of approximately $800 million in the second quarter of 2012, the remaining $800 million of the settlement was paid in October 2012. The payments did not materially affect Abbott’s liquidity as other cash flow from operations was sufficient to fund these payments.
19
Working capital was $11.0 billion at September 30, 2012 and $8.3 billion at December 31, 2011. Substantially all of Abbott’s trade receivables in Italy, Spain, Portugal, and Greece are with governmental health systems. Outstanding net governmental receivables in these countries at September 30, 2012 were: (dollars in millions)
Net Receivables
Percentage Over One Year Past Due
Italy
610
21.5
Spain
0.4
Portugal
19.3
Greece
26.6
Abbott closely monitors economic conditions and budgetary and other fiscal developments in these countries. Abbott regularly communicates with its customers regarding the status of receivable balances, including their payment plans and obtains positive confirmation of the validity of the receivables. Abbott also monitors the potential for and periodically has utilized factoring arrangements to mitigate risk although such arrangements were not material in the first nine months of 2012.
At September 30, 2012, Abbott’s long-term debt rating was AA by Standard & Poor’s Corporation and A1 by Moody’s Investors Service. On October 26, 2012, Moody’s confirmed its A1 rating and Standard & Poor’s reduced its rating to A+. Abbott has readily available financial resources. In the third quarter 2012, Abbott replaced unused lines of credit of $3.0 billion and $3.7 billion that were to expire in October 2012 and in 2013, respectively, with two five-year credit facilities totaling $7.0 billion that support commercial paper borrowing arrangements.
In October 2012 Abbott initiated a cash tender offer, totaling $7.7 billion, for all or a portion of nine series of its outstanding notes. Abbott expects to incur a cost of $1.2 billion to extinguish this debt, net of estimated gains expected to result from the unwinding of interest rate swaps related to the debt. In early November 2012 AbbVie Inc., a wholly owned subsidiary of Abbott, launched an offering of approximately $14.7 billion of long-term debt with maturities ranging from 3 to 30 years. The debt offering is expected to close in November 2012. AbbVie expects to issue approximately $1.0 billion of short-term debt in the fourth quarter of 2012. The debt issued by AbbVie Inc. will be guaranteed by Abbott with the guarantee expiring when AbbVie Inc. separates from Abbott. A $7.5 billion 364-day bridge facility is also in place to support the separation of Abbott into two companies.
Abbott repaid $1.5 billion and $500 million of long-term notes that were due in May and March of 2011, respectively, using primarily short-term borrowings.
In October 2008, the board of directors authorized the purchase of up to $5 billion of Abbott’s common shares from time to time and 27.2 million shares were purchased in the first nine months of 2012 under this authorization at a cost of approximately $1.6 billion. No shares were purchased under this authorization in the first nine months of 2011.
Legislative Issues
In 2010, the Patient Protection and 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.
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 and in Item 1A, Risk Factors, in the quarterly report for the quarter ended June 30, 2012.
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 September 30, 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.
During the quarter, Abbott implemented new enterprise resource planning system functionality relating to the order-to-cash business process for a large part of its U.S. operations. The new functionality replaced 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.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
Abbott is involved in various claims, legal proceedings and investigations, including (as of September 30, 2012, except where noted below) those described below. Payment of the settlement discussed in the third paragraph of Note 4 to Abbott’s financial statements is material to Abbott’s cash flows in 2012. While it is not feasible to predict the outcome of other 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.
In its 2011 Form 10-K and Form 10-Q for the quarter ended March 31, 2012, 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. In October 2012, the United States District Court for the Western District of Virginia accepted Abbott’s plea and imposed the agreed-upon sentence which finalized the resolution of all federal and state Medicare and Medicaid claims with 49 states and the District of Columbia. As part of the settlement, Abbott entered into a Corporate Integrity Agreement (CIA) with the Office of Inspector General for the U.S. Department of Health and Human Services (OIG) relating to Abbott’s United States pharmaceuticals business. The CIA requires enhancements to certain compliance procedures and contains numerous reporting and monitoring obligations. Abbott also submitted to a term of probation that is initially set at 5 years, and will be shortened to 3 years upon the separation of Abbott and AbbVie Inc., Abbott’s wholly-owned subsidiary formed to hold Abbott’s research-based pharmaceuticals business. The obligations under the CIA and the conditions of probation became effective in October 2012 and transfer to and become fully binding on AbbVie upon the separation and distribution.
In its 2011 Form 10-K and Form 10-Q for the quarter ended June 30, 2012, Abbott reported that several lawsuits filed against Unimed Pharmaceuticals, Inc., Solvay Pharmaceuticals, Inc. (a company acquired by Abbott in February 2010) et al. had been consolidated for pre-trial purposes in the United States District Court for the Northern District of Georgia under Multi District Litigation Rules as In re Androgel Antitrust Litigation, MDL No. 2084. In September 2012, the District Court granted summary judgment in favor of Solvay on all remaining claims of the private plaintiffs. In October 2012, the FTC filed a petition for writ of certiorari with the United States Supreme Court seeking a review of the May 2012 decision of the United States Court of Appeals for the Eleventh Circuit affirming the district court’s dismissal of the FTC’s claims.
In its 2011 Form 10-K and Forms 10-Q for the quarters ended March 31 and June 30, 2012, 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 August 2012, Abbott alleges that Amneal Pharmaceutical’s proposed generic product infringes Abbott’s patents and seeks declaratory and injunctive relief.
Item 1A. Risk Factors
There have been no material changes in our risk factors from those disclosed in Abbott’s 2011 Form 10-K and Form 10-Q for the quarter ended June 30, 2012, except for the following:
Abbott is subject to numerous governmental regulations and it can be costly to comply with these regulations and to develop compliant products and processes.
Abbott’s products are subject to rigorous regulation by the U.S. Food and Drug Administration, and numerous international, supranational, federal, and state authorities. The process of obtaining regulatory approvals to market a drug or medical device can be costly and
23
time-consuming, and approvals might not be granted for future products, or additional indications or uses of existing products, on a timely basis, if at all. Delays in the receipt of, or failure to obtain approvals for, future products, or new indications and uses, could result in delayed realization of product revenues, reduction in revenues, and in substantial additional costs.
In addition, no assurance can be given that Abbott will remain in compliance with applicable FDA and other regulatory requirements once clearance or approval has been obtained for a product. These requirements include, among other things, regulations regarding manufacturing practices, product labeling, and advertising and postmarketing reporting, including adverse event reports and field alerts due to manufacturing quality concerns. Many of Abbott’s facilities and procedures and those of Abbott’s suppliers are subject to ongoing regulation, including periodic inspection by the FDA and other regulatory authorities. Abbott must incur expense and spend time and effort to ensure compliance with these complex regulations. Possible regulatory actions could include warning letters, fines, damages, injunctions, civil penalties, recalls, seizures of Abbott’s products, and criminal prosecution. These actions could result in, among other things, substantial modifications to Abbott’s business practices and operations; refunds, recalls, or seizures of Abbott’s products; a total or partial shutdown of production in one or more of Abbott’s facilities while Abbott or Abbott’s suppliers remedy the alleged violation; the inability to obtain future pre-market clearances or approvals; and withdrawals or suspensions of current products from the market. Any of these events could disrupt Abbott’s business and have a material adverse effect on Abbott’s revenues, profitability and financial condition.
Abbott is a party to a Corporate Integrity Agreement (CIA) with the Office of Inspector General for the U.S. Department of Health and Human Services (OIG) relating to Abbott’s United States pharmaceuticals business. The CIA requires enhancements to certain compliance procedures and contains numerous reporting and monitoring obligations. If Abbott fails to comply with the CIA, it may be subject to monetary penalties or exclusion from federal health care programs. Abbott also submitted to a term of probation that is initially set at 5 years, and will be shortened to 3 years upon the separation of Abbott and AbbVie Inc., Abbott’s wholly-owned subsidiary formed to hold Abbott’s research-based pharmaceuticals business. The conditions of probation include certain reporting requirements, maintenance of certain compliance measures, certifications of the CEO and board of directors, and other conditions. If Abbott violates the terms of its probation, it may face additional monetary sanctions and other such remedies as the court deems appropriate. The obligations under the CIA and the conditions of probation became effective in October 2012 and transfer to and become fully binding on AbbVie upon the separation and distribution.
24
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
July 1, 2012 — July 31, 2012
830,476
(1)
65.647
0
1,792,179,707
(2)
August 1, 2012 — August 31, 2012
184,098
66.010
September 1, 2012 — September 30, 2012
578,205
68.504
1,592,779
66.726
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 — 830,476 in July, 134,098 in August, and 538,205 in September; 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 July, 50,000 in August, and 40,000 in September.
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.
Item 6. Exhibits
Incorporated by reference to the Exhibit Index included herewith.
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.
By:
/s/ Thomas C. Freyman
Thomas C. Freyman
Executive Vice President,
Finance and Chief Financial Officer
Date: November 7, 2012
EXHIBIT INDEX
Exhibit No.
Exhibit
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 September 30, 2012, filed on November 7, 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.