Document


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, 2018

OR

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

For the transition period from                                    to                                   

Commission File No. 001-35565

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AbbVie Inc.
(Exact name of registrant as specified in its charter)
Delaware
 
32-0375147
(State or other jurisdiction of incorporation or organization)
 
(I.R.S. employer identification number) 

1 North Waukegan Road
North Chicago, Illinois 60064

Telephone: (847) 932-7900

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 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 ¨

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 ¨

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.
Large Accelerated Filer x
 
Accelerated Filer ¨
 
 
 
 
 
Non-Accelerated Filer ¨
 
Smaller reporting company ¨
 
(Do not check if a smaller reporting company)
 
 
 
 
 
Emerging growth company ¨
 

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

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

As of October 31, 2018, AbbVie Inc. had 1,504,216,327 shares of common stock at $0.01 par value outstanding.




AbbVie Inc. and Subsidiaries
Table of Contents

 
 
Page
 
 
 
Item 1.
Item 2.
Item 3.
Item 4.
 
 
 
 
 
 
Item 1.
Item 2.
Item 6.


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1




PART I.    FINANCIAL INFORMATION

ITEM 1.    FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
 
AbbVie Inc. and Subsidiaries
Condensed Consolidated Statements of Earnings (unaudited)

 
 
Three months ended
September 30,
 
Nine months ended
September 30,
(in millions, except per share data)
 
2018
 
2017
 
2018
 
2017
Net revenues
 
$
8,236

 
$
6,995

 
$
24,448

 
$
20,477

 
 
 
 
 
 
 
 
 
Cost of products sold
 
1,835

 
1,616

 
5,696

 
4,761

Selling, general and administrative
 
1,919

 
1,457

 
5,470

 
4,339

Research and development
 
1,268

 
1,228

 
3,834

 
3,599

Acquired in-process research and development
 
55

 

 
124

 
15

Other expense
 

 

 
500

 

Total operating costs and expenses
 
5,077

 
4,301

 
15,624

 
12,714

Operating earnings
 
3,159

 
2,694

 
8,824

 
7,763

 
 
 
 
 
 
 
 
 
Interest expense, net
 
302

 
252

 
825

 
752

Net foreign exchange loss
 
2

 
9

 
18

 
28

Other expense, net
 
94

 
338

 
411

 
449

Earnings before income tax expense
 
2,761

 
2,095

 
7,570

 
6,534

Income tax expense
 
14

 
464

 
57

 
1,277

Net earnings
 
$
2,747

 
$
1,631

 
$
7,513

 
$
5,257

 
 
 
 
 
 
 
 
 
Per share data
 
 
 
 
 
 
 
 
Basic earnings per share
 
$
1.81

 
$
1.02

 
$
4.81

 
$
3.28

Diluted earnings per share
 
$
1.81

 
$
1.01

 
$
4.79

 
$
3.27

 
 
 
 
 
 
 
 
 
Weighted-average basic shares outstanding
 
1,511

 
1,597

 
1,556

 
1,596

Weighted-average diluted shares outstanding
 
1,515

 
1,603

 
1,561

 
1,602


The accompanying notes are an integral part of these condensed consolidated financial statements.

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2




AbbVie Inc. and Subsidiaries
Condensed Consolidated Statements of Comprehensive Income (unaudited)

 
Three months ended
September 30,
 
Nine months ended
September 30,
(in millions)
2018
 
2017
 
2018
 
2017
Net earnings
$
2,747

 
$
1,631

 
$
7,513

 
$
5,257

 
 
 
 
 
 
 
 
Foreign currency translation adjustments, net of tax expense (benefit) of $3 for the three months and $(16) for the nine months ended September 30, 2018 and $7 for the three months and $40 for the nine months ended September 30, 2017
30

 
183

 
(250
)
 
602

Net investment hedging activities, net of tax expense (benefit) of $(9) for the three months and $22 for the nine months ended September 30, 2018 and $(52) for the three months and $(174) for the nine months ended September 30, 2017
(32
)
 
(90
)
 
73

 
(307
)
Pension and post-employment benefits, net of tax expense (benefit) of $8 for the three months and $24 for the nine months ended September 30, 2018 and $8 for the three months and $23 for the nine months ended September 30, 2017
28

 
8

 
99

 
21

Marketable security activities, net of tax expense (benefit) of $— for the three months and $— for the nine months ended September 30, 2018 and $4 for the three months and $6 for the nine months ended September 30, 2017

 
(28
)
 
(2
)
 
(18
)
Cash flow hedging activities, net of tax expense (benefit) of $1 for the three months and $18 for the nine months ended September 30, 2018 and $(14) for the three months and $(29) for the nine months ended September 30, 2017
54

 
(138
)
 
248

 
(325
)
Other comprehensive income (loss)
80

 
(65
)
 
168

 
(27
)
Comprehensive income
$
2,827

 
$
1,566

 
$
7,681

 
$
5,230


The accompanying notes are an integral part of these condensed consolidated financial statements.





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3




AbbVie Inc. and Subsidiaries
Condensed Consolidated Balance Sheets

(in millions, except share data)
September 30,
2018
 
December 31,
2017
 
(unaudited)
 
 
Assets
 
 
 
Current assets
 
 
 
Cash and equivalents
$
8,015

 
$
9,303

Short-term investments
770

 
486

Accounts receivable, net
5,780

 
5,088

Inventories
1,786

 
1,605

Prepaid expenses and other
2,114

 
4,741

Total current assets
18,465

 
21,223

 
 
 
 
Investments
1,463

 
2,090

Property and equipment, net
2,950

 
2,803

Intangible assets, net
26,625

 
27,559

Goodwill
15,718

 
15,785

Other assets
943

 
1,326

Total assets
$
66,164

 
$
70,786

 
 
 
 
Liabilities and Equity
 
 
 
Current liabilities
 
 
 
Short-term borrowings
$
3,002

 
$
400

Current portion of long-term debt and lease obligations
1,019

 
6,015

Accounts payable and accrued liabilities
11,366

 
10,226

Total current liabilities
15,387

 
16,641

 
 
 
 
Long-term debt and lease obligations
36,487

 
30,953

Deferred income taxes
1,490

 
2,490

Other long-term liabilities
15,721

 
15,605

 
 
 
 
Commitments and contingencies


 


 
 
 
 
Stockholders’ equity (deficit)
 
 
 
Common stock, $0.01 par value, 4,000,000,000 shares authorized, 1,776,109,692 shares issued as of September 30, 2018 and 1,768,738,550 as of December 31, 2017
18

 
18

Common stock held in treasury, at cost, 271,949,381 shares as of September 30, 2018 and 176,607,525 as of December 31, 2017
(21,849
)
 
(11,923
)
Additional paid-in capital
14,680

 
14,270

Retained earnings
6,789

 
5,459

Accumulated other comprehensive loss
(2,559
)
 
(2,727
)
Total stockholders’ equity (deficit)
(2,921
)
 
5,097

 
 
 
 
Total liabilities and equity
$
66,164

 
$
70,786


The accompanying notes are an integral part of these condensed consolidated financial statements.

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4




AbbVie Inc. and Subsidiaries
Condensed Consolidated Statements of Cash Flows (unaudited)
 
Nine months ended
September 30,
(in millions) (brackets denote cash outflows)
2018
 
2017
Cash flows from operating activities
 
 
 
Net earnings
$
7,513

 
$
5,257

Adjustments to reconcile net earnings to net cash from operating activities:
 
 
 
Depreciation
349

 
324

Amortization of intangible assets
974

 
808

Change in fair value of contingent consideration liabilities
432

 
547

Stock-based compensation
351

 
288

Upfront costs and milestones related to collaborations
711

 
85

Other, net
423

 
(73
)
Changes in operating assets and liabilities:
 
 
 
Accounts receivable
(806
)
 
(163
)
Inventories
(367
)
 
(119
)
Prepaid expenses and other assets
(426
)
 
(22
)
Accounts payable and other liabilities
881

 
444

Cash flows from operating activities
10,035

 
7,376

 
 
 
 
Cash flows from investing activities
 
 
 
Acquisitions and investments
(541
)
 
(180
)
Acquisitions of property and equipment
(515
)
 
(347
)
Purchases of investment securities
(1,581
)
 
(1,838
)
Sales and maturities of investment securities
1,914

 
1,890

Cash flows from investing activities
(723
)
 
(475
)
 
 
 
 
Cash flows from financing activities
 
 
 
Net change in commercial paper borrowings
(400
)
 
423

Proceeds from issuance of other short-term borrowings
3,002

 

Proceeds from issuance of long-term debt
5,963

 

Repayments of long-term debt and lease obligations
(5,021
)
 
(18
)
Debt issuance costs
(34
)
 

Dividends paid
(4,129
)
 
(3,077
)
Purchases of treasury stock
(9,956
)
 
(905
)
Proceeds from the exercise of stock options
66

 
214

Payments of contingent consideration liabilities
(78
)
 
(268
)
Other, net
16

 
47

Cash flows from financing activities
(10,571
)
 
(3,584
)
Effect of exchange rate changes on cash and equivalents
(29
)
 
29

Net change in cash and equivalents
(1,288
)
 
3,346

Cash and equivalents, beginning of period
9,303

 
5,100

 
 
 
 
Cash and equivalents, end of period
$
8,015

 
$
8,446


The accompanying notes are an integral part of these condensed consolidated financial statements.

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5




AbbVie Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements (unaudited)
Note 1    Basis of Presentation
 

Basis of Historical Presentation
The unaudited interim condensed consolidated financial statements of AbbVie Inc. (AbbVie or the company) have been prepared pursuant to the rules and regulations of the U.S. Securities and Exchange Commission. Accordingly, certain information and footnote disclosures normally included in annual financial statements prepared in accordance with generally accepted accounting principles in the United States (U.S. GAAP) have been omitted. These unaudited interim condensed consolidated financial statements should be read in conjunction with the company’s audited consolidated financial statements and notes included in the company’s Annual Report on Form 10-K for the year ended December 31, 2017.
It is management’s opinion that these financial statements include all normal and recurring adjustments necessary for a fair presentation of the company’s financial position and operating results. Net revenues and net earnings for any interim period are not necessarily indicative of future or annual results. Certain reclassifications were made to conform the prior period interim condensed consolidated financial statements to the current period presentation.
Recent Accounting Pronouncements
Recently Adopted Accounting Pronouncements
ASU No. 2014-09
In May 2014, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2014-09, Summary and Amendments That Create Revenue from Contracts with Customers (Topic 606) and Other Assets and Deferred Costs - Contracts with Customers (Subtopic 340-40). The amendments in this standard superseded most existing revenue recognition requirements. The core principle of the new guidance is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. AbbVie adopted the standard in the first quarter of 2018 using the modified retrospective method. Results for reporting periods beginning after December 31, 2017 have been presented in accordance with the standard, while results for prior periods have not been adjusted and continue to be reported in accordance with AbbVie’s historical accounting. The cumulative effect of initially applying the new revenue standard was recognized as an adjustment to the opening balance of retained earnings as of January 1, 2018.
There were no significant changes to the amounts or timing of revenue recognition for product sales, the company's primary revenue stream. For certain licensing arrangements where revenue was previously deferred and recognized over time, revenue is now recognized at the point in time when the license is granted. Additionally, for certain contract manufacturing arrangements where revenue was previously recognized at a point in time at the end of the manufacturing process, revenue is now recognized over time throughout the manufacturing process.
Under the new standard, on January 1, 2018, the company recognized a cumulative-effect adjustment to retained earnings primarily related to certain deferred license revenues that were originally expected to be recognized through early 2020. The adjustment to the condensed consolidated balance sheet included: (i) a $42 million increase to prepaid expenses and other; (ii) a $39 million decrease to inventories; (iii) a $57 million decrease to accounts payable and accrued liabilities; (iv) a $75 million decrease to other long-term liabilities; (v) a $22 million increase to deferred income taxes; and (vi) a $124 million increase to retained earnings. Other cumulative-effect adjustments to the condensed consolidated balance sheet were insignificant.

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6




The impact of adoption on the company’s condensed consolidated statements of earnings for the three and nine months ended September 30, 2018 was as follows:
 
 
Three months ended
September 30, 2018
 
Nine months ended
September 30, 2018
(in millions, except per share data)
 
As Reported
 
Balances Without Adoption of
ASU 2014-09
 
Effect of Change Higher/(Lower)
 
As Reported
 
Balances Without Adoption of
ASU 2014-09
 
Effect of Change Higher/(Lower)
Net revenues
 
$
8,236

 
$
8,270

 
$
(34
)
 
$
24,448

 
$
24,452

 
$
(4
)
Cost of products sold
 
1,835

 
1,851

 
(16
)
 
5,696

 
5,696

 

Income tax expense
 
14

 
16

 
(2
)
 
57

 
52

 
5

Net earnings
 
2,747

 
2,763

 
(16
)
 
7,513

 
7,522

 
(9
)
Diluted earnings per share
 
$
1.81

 
$
1.82

 
$
(0.01
)
 
$
4.79

 
$
4.80

 
$
(0.01
)
As of September 30, 2018, due to the impact of the adoption of ASU 2014-09, prepaid expenses and other were $81 million higher, inventories were $38 million lower, accounts payable and accrued liabilities were $47 million lower, other long-term liabilities were $32 million lower, deferred income taxes were $14 million higher and retained earnings were $115 million higher on the company’s condensed consolidated balance sheet than they would have been had ASU 2014-09 not been adopted. Other impacts to the condensed consolidated balance sheet were insignificant.
ASU No. 2016-01
In January 2016, the FASB issued ASU No. 2016-01, Financial Instruments - Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities. The standard requires several targeted changes including that equity investments (except those accounted for under the equity method of accounting, or those that result in consolidation of the investee) be measured at fair value with changes in fair value recognized in net earnings. AbbVie adopted the standard in the first quarter of 2018. The adoption did not impact the accounting for AbbVie's investments in debt securities and did not have a material impact on the company's consolidated financial statements.
ASU No. 2016-16
In October 2016, the FASB issued ASU No. 2016-16, Income Taxes (Topic 740). The standard requires entities to recognize the income tax consequences of an intercompany transfer of an asset other than inventory when the transfer occurs. Under previous U.S. GAAP, the income tax consequences of these intercompany asset transfers were deferred until the asset was sold to a third party or otherwise recovered through use. AbbVie adopted the standard in the first quarter of 2018 using the modified retrospective method. As a result, on January 1, 2018, the company recorded a cumulative-effect adjustment to its condensed consolidated balance sheet that included a $1.9 billion decrease to retained earnings, a $1.4 billion decrease to prepaid expenses and other and a $0.5 billion decrease to other assets.
ASU No. 2017-07
In March 2017, the FASB issued ASU No. 2017-07, Compensation - Retirement Benefits (Topic 715): Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost. The standard requires that an employer continue to report the service cost component of net periodic benefit cost in the same income statement line item or items as other employee compensation costs arising from services rendered during the period. The other components of net periodic benefit cost are required to be presented separately outside of income from operations and are not eligible for capitalization. AbbVie adopted the standard in the first quarter of 2018 and applied the income statement classification provisions of this standard retrospectively. As a result, the company reclassified income of $10 million from operating earnings to non-operating income for the three months and $34 million for the nine months ended September 30, 2017. Additionally, the company recorded approximately $8 million of non-operating income for the three months and $26 million for the nine months ended September 30, 2018 which would have been recorded in operating earnings under the previous guidance.
ASU No. 2017-12
In August 2017, the FASB issued ASU No. 2017-12, Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities. The standard simplifies the application of hedge accounting and more closely aligns the accounting with an entity’s risk management activities. AbbVie elected to early adopt the standard in the first quarter of 2018. The adoption did not have a material impact on the company's consolidated financial statements.

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7




Recent Accounting Pronouncements Not Yet Adopted
ASU No. 2016-02
In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842). The standard outlines a comprehensive lease accounting model that supersedes the current lease guidance and requires lessees to recognize lease liabilities and corresponding right-of-use assets for all leases with lease terms greater than 12 months. The guidance also changes the definition of a lease and expands the disclosure requirements of lease arrangements. AbbVie is currently assessing the impact of adopting this guidance on its consolidated financial statements and related disclosures. AbbVie will adopt the standard effective in the first quarter of 2019 and will not restate comparative periods upon adoption. AbbVie will elect a package of practical expedients for leases that commenced prior to January 1, 2019 and will not reassess: (i) whether any expired or existing contracts are or contain leases; (ii) lease classification for any expired or existing leases; and (iii) initial direct costs capitalization for any existing leases. AbbVie does not expect the adoption will have a material impact on its consolidated statement of earnings. However, the new standard will require AbbVie to establish liabilities and corresponding right-of-use assets on its consolidated balance sheet for operating leases that exist as of the adoption date.
ASU No. 2016-13
In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments - Credit Losses (Topic 326). The standard changes how credit losses are measured for most financial assets and certain other instruments. For trade and other receivables, held-to-maturity debt securities, loans and other financial instruments, the standard requires the use of a new forward-looking "expected credit loss" model that generally will result in the earlier recognition of allowances for losses. For available-for-sale debt securities with unrealized losses, the standard now requires allowances to be recorded instead of reducing the amortized cost of the investment. Additionally, the standard requires new disclosures and will be effective for AbbVie starting with the first quarter of 2020. Early adoption beginning in the first quarter of 2019 is permitted. With certain exceptions, adjustments are to be applied using a modified-retrospective approach by reflecting adjustments through a cumulative-effect impact to retained earnings as of the beginning of the fiscal year of adoption. AbbVie is currently assessing the impact and timing of adopting this guidance on its consolidated financial statements.
ASU No. 2018-02
In February 2018, the FASB issued ASU No. 2018-02, Income Statement - Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income, which allows a reclassification from accumulated other comprehensive income (AOCI) to retained earnings for stranded tax effects related to adjustments to deferred taxes resulting from the December 2017 enactment of the Tax Cuts and Jobs Act. The standard will be effective for AbbVie starting with the first quarter of 2019, with early adoption permitted. AbbVie is currently assessing the impact and timing of adopting this guidance on its consolidated financial statements.
Note 2 Revenue Recognition
 

AbbVie recognizes revenue when control of promised goods or services is transferred to the company’s customers, in an amount that reflects the consideration AbbVie expects to be entitled to in exchange for those goods or services. Sales, value add and other taxes collected concurrent with revenue-producing activities are excluded from revenue. AbbVie generates revenue primarily from product sales. For the majority of sales, the company transfers control, invoices the customer and recognizes revenue upon shipment to the customer. The company recognizes shipping and handling costs as an expense in cost of products sold when the company transfers control to the customer. Payment terms vary depending on the type and location of the customer, are based on customary commercial terms and are generally less than one year. AbbVie does not adjust revenue for the effects of a significant financing component for contracts where AbbVie expects the period between the transfer of the good or service and collection to be one year or less.
Discounts, rebates, sales incentives to customers, returns and certain other adjustments are accounted for as variable consideration. Provisions for variable consideration are based on current pricing, executed contracts, government pricing legislation and historical data and are provided for in the period the related revenues are recorded. Rebate amounts are typically based upon the volume of purchases using contractual or statutory prices, which may vary by product and by payer. For each type of rebate, factors used in the calculation of the accrual include the identification of the products subject to the rebate, the applicable price terms and the estimated lag time between sale and payment of the rebate, which can be significant. Sales incentives to customers are insignificant.

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8




In addition to revenue from contracts with customers, the company also recognizes certain collaboration revenues. See Note 6 for additional information related to the collaboration with Janssen Biotech, Inc. Additionally, see Note 14 for disaggregation of revenue by product and geography.
Note 3    Supplemental Financial Information
 

Interest Expense, Net
 
 
Three months ended
September 30,
 
Nine months ended
September 30,
(in millions)
 
2018
 
2017
 
2018
 
2017
Interest expense
 
$
339

 
$
293

 
$
968

 
$
851

Interest income
 
(37
)
 
(41
)
 
(143
)
 
(99
)
Interest expense, net
 
$
302

 
$
252

 
$
825

 
$
752

Inventories
(in millions)
September 30, 2018
 
December 31, 2017
Finished goods
$
522

 
$
610

Work-in-process
1,054

 
822

Raw materials
210

 
173

Inventories
$
1,786

 
$
1,605

Property and Equipment
(in millions)
September 30, 2018
 
December 31, 2017
Property and equipment, gross
$
8,449

 
$
8,071

Accumulated depreciation
(5,499
)
 
(5,268
)
Property and equipment, net
$
2,950

 
$
2,803

Depreciation expense was $115 million for the three months and $349 million for the nine months ended September 30, 2018 and $111 million for the three months and $324 million for the nine months ended September 30, 2017.
Note 4    Earnings Per Share
 

AbbVie grants certain restricted stock awards (RSAs) and restricted stock units (RSUs) that are considered to be participating securities. Due to the presence of participating securities, AbbVie calculates earnings per share (EPS) using the more dilutive of the treasury stock or the two-class method. For all periods presented, the two-class method was more dilutive.


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9




The following table summarizes the impact of the two-class method:

 
 
Three months ended
September 30,
 
Nine months ended
September 30,
(in millions, except per share data)
 
2018
 
2017
 
2018
 
2017
Basic EPS
 
 
 
 
 
 
 
 
Net earnings
 
$
2,747

 
$
1,631

 
$
7,513

 
$
5,257

Earnings allocated to participating securities
 
12

 
8

 
34

 
26

Earnings available to common shareholders
 
$
2,735

 
$
1,623

 
$
7,479

 
$
5,231

Weighted-average basic shares outstanding
 
1,511

 
1,597

 
1,556

 
1,596

Basic earnings per share
 
$
1.81

 
$
1.02

 
$
4.81

 
$
3.28

 
 
 
 
 
 
 
 
 
Diluted EPS
 
 
 
 
 
 
 
 
Net earnings
 
$
2,747

 
$
1,631

 
$
7,513

 
$
5,257

Earnings allocated to participating securities
 
12

 
8

 
34

 
26

Earnings available to common shareholders
 
$
2,735

 
$
1,623

 
$
7,479

 
$
5,231

Weighted-average shares of common stock outstanding
 
1,511

 
1,597

 
1,556

 
1,596

Effect of dilutive securities
 
4

 
6

 
5

 
6

Weighted-average diluted shares outstanding
 
1,515

 
1,603

 
1,561

 
1,602

Diluted earnings per share
 
$
1.81

 
$
1.01

 
$
4.79

 
$
3.27


Certain shares issuable under stock-based compensation plans were excluded from the computation of EPS because the effect would have been antidilutive. The number of common shares excluded was insignificant for all periods presented.
Note 5 Licensing, Acquisitions and Other Arrangements
 

Cash outflows related to acquisitions and investments totaled $541 million for the nine months ended September 30, 2018 and $180 million for the nine months ended September 30, 2017. AbbVie recorded $55 million acquired in-process research and development (IPR&D) charges for the three months ended September 30, 2018 and $124 million for the nine months ended September 30, 2018. Abbvie recorded no acquired IPR&D charges for the three months ended September 30, 2017 and recorded acquired IPR&D charges of $15 million for the nine months ended September 30, 2017.

Calico Life Sciences LLC
In June 2018, AbbVie and Calico Life Sciences LLC (Calico) entered into an extension of a collaboration to discover, develop and bring to market new therapies for patients with age-related diseases, including neurodegeneration and cancer. Under the terms of the agreement, AbbVie and Calico will each contribute an additional $500 million to the collaboration and the term is extended for an additional 3 years. Calico will be responsible for research and early development until 2022 and will advance collaboration projects through Phase 2a through 2027. Following completion of Phase 2a, AbbVie will have the option to exclusively license collaboration compounds. AbbVie will support Calico in its early research and development efforts and, upon exercise, would be responsible for late-stage development and commercial activities. Collaboration costs and profits will be shared equally by both parties post option exercise. During the nine months ended September 30, 2018, AbbVie recorded $500 million in other expense in the condensed consolidated statement of earnings related to its commitments under the agreement.

2018 Form 10-Q | http://api.tenkwizard.com/cgi/image?quest=1&rid=23&ipage=12535452&doc=13
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Note 6 Collaboration with Janssen Biotech, Inc.
 

In December 2011, Pharmacyclics, a wholly-owned subsidiary of AbbVie, entered into a worldwide collaboration and license agreement with Janssen Biotech, Inc. and its affiliates (Janssen), one of the Janssen Pharmaceutical companies of Johnson & Johnson, for the joint development and commercialization of IMBRUVICA, a novel, orally active, selective covalent inhibitor of Bruton's tyrosine kinase (BTK) and certain compounds structurally related to IMBRUVICA, for oncology and other indications, excluding all immune and inflammatory mediated diseases or conditions and all psychiatric or psychological diseases or conditions, in the United States and outside the United States.

The collaboration provides Janssen with an exclusive license to commercialize IMBRUVICA outside of the United States and co-exclusively with AbbVie in the United States. Both parties are responsible for the development, manufacturing and marketing of any products generated as a result of the collaboration. The collaboration has no set duration or specific expiration date and provides for potential future development, regulatory and approval milestone payments of up to $200 million to AbbVie. The collaboration also includes a cost sharing arrangement for associated collaboration activities. Except in certain cases, Janssen is responsible for approximately 60% of collaboration development costs and AbbVie is responsible for the remaining 40% of collaboration development costs.

In the United States, both parties have co-exclusive rights to commercialize the products; however, AbbVie is the principal in the end-customer product sales. AbbVie and Janssen share pre-tax profits and losses equally from the commercialization of products. Sales of IMBRUVICA are included in AbbVie's net revenues. Janssen's share of profits is included in AbbVie's cost of products sold. Other costs incurred under the collaboration are reported in their respective expense line items, net of Janssen's share.

Outside the United States, Janssen is responsible for and has exclusive rights to commercialize IMBRUVICA. AbbVie and Janssen share pre-tax profits and losses equally from the commercialization of products. AbbVie's share of profits is included in AbbVie's net revenues. Other costs incurred under the collaboration are reported in their respective expense line items, net of Janssen's share.

The following table shows the profit and cost sharing relationship between Janssen and AbbVie:

 
 
Three months ended
September 30,
 
Nine months ended
September 30,
(in millions)
 
2018
 
2017
 
2018
 
2017
United States - Janssen's share of profits (included in cost of products sold)
 
$
377

 
$
268

 
$
978

 
$
727

International - AbbVie's share of profits (included in net revenues)
 
160

 
114

 
455

 
306

Global - AbbVie's share of other costs (included in respective line items)
 
81

 
75

 
232

 
209


AbbVie’s receivable from Janssen, included in accounts receivable, net, was $177 million at September 30, 2018 and $124 million at December 31, 2017. AbbVie’s payable to Janssen, included in accounts payable and accrued liabilities, was $362 million at September 30, 2018 and $253 million at December 31, 2017.
Note 7    Goodwill and Intangible Assets
 

Goodwill

The following table summarizes the changes in the carrying amount of goodwill:
(in millions)
 
Balance as of December 31, 2017
$
15,785

Foreign currency translation adjustments
(67
)
Balance as of September 30, 2018
$
15,718


The company performs its annual goodwill impairment assessment in the third quarter, or earlier if impairment indicators exist. As of September 30, 2018, there were no accumulated goodwill impairment losses.

2018 Form 10-Q | http://api.tenkwizard.com/cgi/image?quest=1&rid=23&ipage=12535452&doc=13
11




Intangible Assets, Net

The following table summarizes intangible assets:
 
September 30, 2018
 
December 31, 2017
(in millions)
Gross
carrying
amount
 
Accumulated
amortization
 
Net
carrying
amount
 
Gross
carrying
amount
 
Accumulated
amortization
 
Net
carrying
amount
Definite-lived intangible assets
 
 
 
 
 
 
 
 
 
 
 
Developed product rights
$
15,877

 
$
(5,394
)
 
$
10,483

 
$
16,138

 
$
(4,982
)
 
$
11,156

License agreements
7,865

 
(1,713
)
 
6,152

 
7,822

 
(1,409
)
 
6,413

Total definite-lived intangible assets
23,742

 
(7,107
)
 
16,635

 
23,960

 
(6,391
)
 
17,569

Indefinite-lived research and development
9,990

 

 
9,990

 
9,990

 

 
9,990

Total intangible assets, net
$
33,732

 
$
(7,107
)
 
$
26,625

 
$
33,950

 
$
(6,391
)
 
$
27,559


Amortization expense was $320 million for the three months and $974 million for the nine months ended September 30, 2018 and $268 million for the three months and $808 million for the nine months ended September 30, 2017. Amortization expense was included in cost of products sold in the condensed consolidated statements of earnings.

Indefinite-lived intangible assets represent acquired IPR&D associated with products that have not yet received regulatory approval. Indefinite-lived intangible assets as of September 30, 2018 and December 31, 2017 relate to the 2016 acquisitions of Stemcentrx and Boehringer Ingelheim compounds. The company performs its annual impairment assessment of indefinite-lived intangible assets in the third quarter, or earlier if impairment indicators exist. No impairment charges were recorded for the nine months ended September 30, 2018 and 2017.
Note 8    Restructuring Plans
 

AbbVie recorded restructuring charges of $22 million for the three months and $45 million for the nine months ended September 30, 2018 and $7 million for the three months and $34 million for the nine months ended September 30, 2017.

The following table summarizes the cash activity in the restructuring reserve for the nine months ended September 30, 2018:
(in millions)
 
Accrued balance as of December 31, 2017
$
86

Restructuring charges
34

Payments and other adjustments
(33
)
Accrued balance as of September 30, 2018
$
87

Note 9    Financial Instruments and Fair Value Measures
 

Risk Management Policy

See Note 10 to the company's Annual Report on Form 10-K for the year ended December 31, 2017 for a summary of AbbVie's risk management policy and use of derivative instruments.

Financial Instruments

Various AbbVie foreign subsidiaries enter into foreign currency forward exchange contracts to manage exposures to changes in foreign exchange rates for anticipated intercompany transactions denominated in a currency other than the functional currency of the local entity. These contracts, with notional amounts totaling $1.9 billion at September 30, 2018 and $2.2 billion at December 31, 2017, are designated as cash flow hedges and are recorded at fair value. The durations of these forward exchange contracts were

2018 Form 10-Q | http://api.tenkwizard.com/cgi/image?quest=1&rid=23&ipage=12535452&doc=13
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generally less than eighteen months. Accumulated gains and losses as of September 30, 2018 will be reclassified from AOCI and included in cost of products sold at the time the products are sold, generally not exceeding six months from the date of settlement.

The company also enters into foreign currency forward exchange contracts to manage its exposure to foreign currency denominated trade payables and receivables and intercompany loans. These contracts are not designated as hedges and are recorded at fair value. Resulting gains or losses are reflected in net foreign exchange loss in the consolidated statements of earnings and are generally offset by losses or gains on the foreign currency exposure being managed. These contracts had notional amounts totaling $11.1 billion at September 30, 2018 and $7.7 billion at December 31, 2017.

The company also uses foreign currency forward exchange contracts or foreign currency denominated debt to hedge its net investments in certain foreign subsidiaries and affiliates. The company designated €3.6 billion aggregate principal amount of senior Euro notes as net investment hedges at September 30, 2018 and December 31, 2017. Realized and unrealized gains and losses from these hedges are included in AOCI.

AbbVie is a party to interest rate hedge contracts designated as fair value hedges with notional amounts totaling $11.8 billion at September 30, 2018 and December 31, 2017. The effect of the hedge contracts is to change a fixed-rate interest obligation to a floating rate for that portion of the debt. AbbVie records the contracts at fair value and adjusts the carrying amount of the fixed-rate debt by an offsetting amount.

No amounts are excluded from the assessment of effectiveness for cash flow hedges, net investment hedges or fair value hedges.

The following table summarizes the amounts and location of AbbVie’s derivative instruments on the condensed consolidated balance sheets:
 
Fair value –
Derivatives in asset position
 
Fair value –
Derivatives in liability position
(in millions)
Balance sheet caption
September 30,
2018
December 31, 2017
 
Balance sheet caption
September 30,
2018
December 31, 2017
Foreign currency forward exchange contracts
 
 
 
 
 
 
 
Designated as cash flow hedges
Prepaid expenses and
other
$
95

$
1

 
Accounts payable and accrued liabilities
$
2

$
120

Designated as cash flow hedges
Other assets
3


 
Other long-term liabilities


Not designated as hedges
Prepaid expenses and
other
17

22

 
Accounts payable and accrued liabilities
14

29

Interest rate swaps designated as fair value hedges
Prepaid expenses and other


 
Accounts payable and accrued liabilities
7

8

Interest rate swaps designated as fair value hedges
Other assets


 
Other long-term liabilities
700

393

Total derivatives
 
$
115

$
23

 
 
$
723

$
550


While certain derivatives are subject to netting arrangements with the company’s counterparties, the company does not offset derivative assets and liabilities within the condensed consolidated balance sheets.

The following table presents the pre-tax amounts of gains (losses) from derivative instruments recognized in other comprehensive income (loss):
 
 
Three months ended
September 30,
 
Nine months ended
September 30,
(in millions)
 
2018
 
2017
 
2018
 
2017
Foreign currency forward exchange contracts
 
$
1

 
$
(114
)
 
$
122

 
$
(253
)

Assuming market rates remain constant through contract maturities, the company expects to transfer pre-tax gains of $63 million into cost of products sold for foreign currency cash flow hedges during the next 12 months.


2018 Form 10-Q | http://api.tenkwizard.com/cgi/image?quest=1&rid=23&ipage=12535452&doc=13
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Related to AbbVie’s non-derivative, foreign currency denominated debt designated as net investment hedges, the company recognized a pre-tax loss in other comprehensive income (loss) of $41 million for the three months and a pre-tax gain of $95 million for the nine months ended September 30, 2018 and recognized pre-tax losses in other comprehensive income (loss) of $142 million for the three months and $481 million for the nine months ended September 30, 2017.

The following table summarizes the pre-tax amounts and location of derivative instrument net gains (losses) recognized in the condensed consolidated statements of earnings, including the net gains (losses) reclassified out of AOCI into net earnings. See Note 11 for the amount of net gains (losses) reclassified out of AOCI.

 
 
 
Three months ended
September 30,
 
Nine months ended
September 30,
(in millions)
Statement of earnings caption
 
2018
 
2017
 
2018
 
2017
Foreign currency forward exchange contracts
 
 
 
 
 
 
 
 
 
Designated as cash flow hedges
Cost of products sold
 
$
(54
)
 
$
38

 
$
(144
)
 
$
101

Not designated as hedges
Net foreign exchange loss
 
22

 
(17
)
 
91

 
(88
)
Interest rate swaps designated as fair value hedges
Interest expense, net
 
(63
)
 
11

 
(306
)
 
43

Debt designated as hedged item in fair value hedges
Interest expense, net
 
63

 
(11
)
 
306

 
(43
)

Fair Value Measures

The fair value hierarchy consists of the following three levels:

Level 1 – Valuations based on unadjusted quoted prices in active markets for identical assets that the company has the ability to access;
Level 2 – Valuations based on quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active and model-based valuations in which all significant inputs are observable in the market; and
Level 3 – Valuations using significant inputs that are unobservable in the market and include the use of judgment by the company’s management about the assumptions market participants would use in pricing the asset or liability.

The following table summarizes the bases used to measure certain assets and liabilities carried at fair value on a recurring basis on the condensed consolidated balance sheet as of September 30, 2018:
 
 
 
Basis of fair value measurement
(in millions)
Total
 
Quoted prices in active markets for
identical assets
(Level 1)
 
Significant other
observable
inputs
(Level 2)
 
Significant
unobservable
inputs
(Level 3)
Assets
 
 
 
 
 
 
 
Cash and equivalents
$
8,015

 
$
653

 
$
7,362

 
$

Time deposits
559

 

 
559

 

Debt securities
1,591

 

 
1,591

 

Equity securities
5

 
5

 

 

Foreign currency contracts
115

 

 
115

 

Total assets
$
10,285

 
$
658

 
$
9,627

 
$

Liabilities
 
 
 
 
 
 
 
Interest rate hedges
$
707

 
$

 
$
707

 
$

Foreign currency contracts
16

 

 
16

 

Contingent consideration
4,866

 

 

 
4,866

Total liabilities
$
5,589

 
$

 
$
723

 
$
4,866



2018 Form 10-Q | http://api.tenkwizard.com/cgi/image?quest=1&rid=23&ipage=12535452&doc=13
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The following table summarizes the bases used to measure certain assets and liabilities carried at fair value on a recurring basis on the condensed consolidated balance sheet as of December 31, 2017:
 
 
 
Basis of fair value measurement
(in millions)
Total
 
Quoted prices in active markets for
identical assets
(Level 1)
 
Significant other
observable
inputs
(Level 2)
 
Significant
unobservable
inputs
(Level 3)
Assets
 
 
 
 
 
 
 
Cash and equivalents
$
9,303

 
$
849

 
$
8,454

 
$

Debt securities
2,524

 

 
2,524

 

Equity securities
4

 
4

 

 

Foreign currency contracts
23

 

 
23

 

Total assets
$
11,854

 
$
853

 
$
11,001

 
$

Liabilities
 
 
 
 
 
 
 
Interest rate hedges
$
401

 
$

 
$
401

 
$

Foreign currency contracts
149

 

 
149

 

Contingent consideration
4,534

 

 

 
4,534

Total liabilities
$
5,084

 
$

 
$
550

 
$
4,534


The fair values of time deposits approximate their amortized cost due to the short maturities of these instruments. The fair values of available-for-sale debt securities were determined based on prices obtained from commercial pricing services. The derivatives entered into by the company were valued using publicized spot curves for interest rate hedges and publicized forward curves for foreign currency contracts. The fair value measurements of the contingent consideration liabilities were determined based on significant unobservable inputs, including the discount rate, estimated probabilities and timing of achieving specified development, regulatory and commercial milestones and the estimated amount of future sales of the acquired products still in development. Changes to the fair value of the contingent consideration liabilities can result from changes to one or a number of inputs, including discount rates, the probabilities of achieving the milestones, the time required to achieve the milestones and estimated future sales. Significant judgment is employed in determining the appropriateness of these inputs. Changes to the inputs described above could have a material impact on the company's financial position and results of operations in any given period. At September 30, 2018, a 50 basis point increase/decrease in the assumed discount rate would have decreased/increased the value of the contingent consideration liabilities by approximately $170 million. Additionally, at September 30, 2018, a five percentage point increase/decrease in the assumed probability of success across all potential indications would have increased/decreased the value of the contingent consideration liabilities by approximately $410 million.

There have been no transfers of assets or liabilities between the fair value measurement levels. The following table presents the changes in fair value of contingent consideration liabilities which are measured using Level 3 inputs:
 
 
 
Nine months ended
September 30,
(in millions)
 
2018
 
2017
Beginning balance
 
$
4,534

 
$
4,213

Change in fair value recognized in net earnings
 
432

 
547

Milestone payments
 
(100
)
 
(305
)
Ending balance
 
$
4,866

 
$
4,455

 
The change in fair value recognized in net earnings is recorded in other expense, net in the condensed consolidated statements of earnings.

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Certain financial instruments are carried at historical cost or some basis other than fair value. The book values, approximate fair values and bases used to measure the approximate fair values of certain financial instruments as of September 30, 2018 are shown in the table below:

 
 
 
 
Basis of fair value measurement
(in millions)
Book value
Approximate fair value
 
Quoted prices
in active markets for
identical assets
(Level 1)
 
Significant
other 
observable
inputs
(Level 2)
 
Significant
unobservable
inputs
(Level 3)
Liabilities
 
 
 
 
 
 
 
 
Short-term borrowings
$
3,002

$
3,002

 
$

 
$
3,002

 
$

Current portion of long-term debt and lease obligations, excluding fair value hedges
1,026

1,025

 
999

 
26

 

Long-term debt and lease obligations, excluding fair value hedges
37,187

36,392

 
36,320

 
72

 

Total liabilities
$
41,215

$
40,419

 
$
37,319

 
$
3,100

 
$


AbbVie also holds investments in equity securities that do not have readily determinable fair values. The company records these investments at cost and remeasures them to fair value based on certain observable price changes or impairment events as they occur. The carrying amount of these investments was $78 million as of September 30, 2018. No significant cumulative upward or downward adjustments have been recorded for these investments as of September 30, 2018. Prior to the adoption of ASU No. 2016-01 discussed in Note 1, these investments were accounted for under the cost method and disclosed in the table below as of December 31, 2017.

The book values, approximate fair values and bases used to measure the approximate fair values of certain financial instruments as of December 31, 2017 are shown in the table below:

 
 
 
 
Basis of fair value measurement
(in millions)
Book value
Approximate fair value
 
Quoted prices
in active markets for
identical assets
(Level 1)
 
Significant
other 
observable
inputs
(Level 2)
 
Significant
unobservable
inputs
(Level 3)
Assets
 
 
 
 
 
 
 
 
Investments
$
48

$
48

 
$

 
$

 
$
48

Total assets
$
48

$
48

 
$

 
$

 
$
48

Liabilities
 
 
 
 
 
 
 
 
Short-term borrowings
$
400

$
400

 
$

 
$
400

 
$

Current portion of long-term debt and lease obligations, excluding fair value hedges
6,023

6,034

 
4,004

 
2,030

 

Long-term debt and lease obligations, excluding fair value hedges
31,346

32,846

 
32,763

 
83

 

Total liabilities
$
37,769

$
39,280

 
$
36,767

 
$
2,513

 
$


2018 Form 10-Q | http://api.tenkwizard.com/cgi/image?quest=1&rid=23&ipage=12535452&doc=13
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Available-for-sale Securities

Substantially all of the company’s investments in debt securities were classified as available-for-sale with changes in fair value recognized in other comprehensive income. Debt securities classified as short-term were $210 million as of September 30, 2018 and $482 million as of December 31, 2017. Long-term debt securities mature primarily within five years. Estimated fair values of available-for-sale debt securities were generally determined based on prices obtained from commercial pricing services.

The following table is a summary of available-for-sale securities by type as of September 30, 2018:
 
Amortized cost
 
Gross unrealized
 
Fair value
(in millions)
 
Gains
 
Losses
 
Asset backed securities
$
447

 
$

 
$
(2
)
 
$
445

Corporate debt securities
1,050

 
3

 
(3
)
 
1,050

Other debt securities
97

 

 
(1
)
 
96

Total
$
1,594

 
$
3

 
$
(6
)
 
$
1,591


The following table is a summary of available-for-sale securities by type as of December 31, 2017:
 
Amortized cost
 
Gross unrealized
 
Fair value
(in millions)
 
Gains
 
Losses
 
Asset backed securities
$
930

 
$
1

 
$
(3
)
 
$
928

Corporate debt securities
1,451

 
4

 
(2
)
 
1,453

Other debt securities
144

 

 
(1
)
 
143

Equity securities
4

 
2

 
(2
)
 
4

Total
$
2,529

 
$
7

 
$
(8
)
 
$
2,528


AbbVie had no other-than-temporary impairments as of September 30, 2018. Net realized gains (losses) were insignificant for both the three and nine months ended September 30, 2018 and 2017.

Concentrations of Risk

AbbVie continues to do business with foreign governments in certain countries, including Greece, Portugal, Italy and Spain, which have historically experienced challenges in credit and economic conditions. Substantially all of AbbVie’s trade receivables in Greece, Portugal, Italy and Spain are with government health systems. Outstanding governmental receivables in these countries, net of allowances for doubtful accounts, totaled $270 million as of September 30, 2018 and $255 million as of December 31, 2017. The company also continues to do business with foreign governments in certain oil-exporting countries that have experienced a deterioration in economic conditions, including Saudi Arabia and Russia, which may result in delays in the collection of receivables. Outstanding governmental receivables related to Saudi Arabia, net of allowances for doubtful accounts, were $147 million as of September 30, 2018 and $149 million as of December 31, 2017. Outstanding governmental receivables related to Russia, net of allowances for doubtful accounts, were $104 million as of September 30, 2018 and $152 million as of December 31, 2017. Global economic conditions and customer-specific factors may require the company to periodically re-evaluate the collectability of its receivables and the company could potentially incur credit losses.

Of total net accounts receivable, three U.S. wholesalers accounted for 61% as of September 30, 2018 and 56% as of December 31, 2017, and substantially all of AbbVie’s net revenues in the United States were to these three wholesalers.

HUMIRA (adalimumab) is AbbVie’s single largest product and accounted for approximately 61% of AbbVie’s total net revenues for the nine months ended September 30, 2018 and 66% for the nine months ended September 30, 2017.

Debt and Credit Facilities
In September 2018, the company issued $6.0 billion aggregate principal amount of unsecured senior notes, consisting of $1.25 billion aggregate principal amount of 3.375% senior notes due 2021, $1.25 billion aggregate principal amount of 3.75% senior notes due 2023, $1.75 billion aggregate principal amount of 4.25% senior notes due 2028 and $1.75 billion aggregate principal amount of

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4.875% senior notes due 2048. These senior notes rank equally with all other unsecured and unsubordinated indebtedness of the company. AbbVie may redeem the senior notes prior to maturity at a redemption price equal to the principal amount of the senior notes redeemed plus a make-whole premium and, except for the 3.375% notes due 2021, AbbVie may redeem the senior notes at par between one and six months prior to maturity. In connection with the offering, debt issuance costs incurred totaled $37 million and debt discounts totaled $37 million and are being amortized over the respective terms of the senior notes to interest expense, net in the condensed consolidated statements of earnings. Of the $5.9 billion net proceeds, $2.0 billion was used to repay the company's outstanding term loan that was due to mature in November 2018. The company intends to use the remaining proceeds to repay senior note obligations in 2018 and term loan obligations in 2019 as they become due.
In May 2018, the company also repaid $3.0 billion aggregate principal amount of 1.80% senior notes at maturity.
Short-Term Borrowings
Short-term borrowings included commercial paper borrowings of $400 million as of December 31, 2017. There were no commercial paper borrowings outstanding as of September 30, 2018. The weighted-average interest rate on commercial paper borrowings was 1.9% for the nine months ended September 30, 2018 and 1.2% for the nine months ended September 30, 2017.
In August 2018, AbbVie replaced its existing revolving credit facility with a new $3.0 billion five-year revolving credit facility that matures in August 2023. The new facility enables the company to borrow funds on an unsecured basis at variable interest rates and contains various covenants, all of which the company was in compliance with as of September 30, 2018.
In May 2018, AbbVie entered into a $3.0 billion 364-day term loan credit agreement (term loan). In June 2018, the company drew on this term loan and as of September 30, 2018, $3.0 billion was outstanding and was included in short-term borrowings on the condensed consolidated balance sheet. Borrowings under the term loan bear interest at one month LIBOR plus applicable margin. The term loan may be prepaid without penalty upon prior notice and contains customary covenants, all of which the company was in compliance with as of September 30, 2018.
Note 10 Post-Employment Benefits
 

The following is a summary of net periodic benefit cost relating to the company’s defined benefit and other post-employment plans:
 
Defined
benefit plans
 
Other post-
employment plans
 
Three months ended
September 30,
 
Nine months ended
September 30,
 
Three months ended
September 30,
 
Nine months ended
September 30,
(in millions)
2018
 
2017
 
2018
 
2017
 
2018
 
2017
 
2018
 
2017
Service cost
$
70

 
$
59

 
$
214

 
$
176

 
$
7

 
$
6

 
$
20

 
$
19

Interest cost
57

 
52

 
171

 
153

 
6

 
6

 
18

 
18

Expected return on plan assets
(109
)
 
(96
)
 
(330
)
 
(286
)
 

 

 

 

Amortization of actuarial losses and prior service costs
38

 
27

 
114

 
80

 

 
1

 
1

 
1

Net periodic benefit cost
$
56

 
$
42

 
$
169

 
$
123

 
$
13

 
$
13

 
$
39

 
$
38

The components of net periodic benefit cost other than service cost are included in other expense, net in the condensed consolidated statements of earnings.

2018 Form 10-Q | http://api.tenkwizard.com/cgi/image?quest=1&rid=23&ipage=12535452&doc=13
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Note 11 Equity
 

Stock-Based Compensation

Stock-based compensation expense is principally related to awards issued pursuant to the AbbVie 2013 Incentive Stock Program and is summarized as follows:
 
 
Three months ended
September 30,
 
Nine months ended
September 30,
(in millions)
 
2018
 
2017
 
2018
 
2017
Cost of products sold
 
$
7

 
$
7

 
$
23

 
$
20

Research and development
 
32

 
30

 
139

 
127

Selling, general and administrative
 
36

 
34

 
189

 
141

Pre-tax compensation expense
 
75

 
71

 
351

 
288

Tax benefit
 
13

 
20

 
61

 
85

After-tax compensation expense
 
$
62

 
$
51

 
$
290

 
$
203


Stock Options

During the nine months ended September 30, 2018, primarily in connection with the company's annual grant, AbbVie granted 0.6 million stock options with a weighted-average grant-date fair value of $21.63. As of September 30, 2018, $8 million of unrecognized compensation cost related to stock options is expected to be recognized as expense over approximately the next two years.

RSAs, RSUs and Performance Shares

During the nine months ended September 30, 2018, primarily in connection with the company's annual grant, AbbVie granted 3.9 million RSUs and performance shares with a weighted-average grant-date fair value of $114.37. As of September 30, 2018, $331 million of unrecognized compensation cost related to RSAs, RSUs and performance shares is expected to be recognized as expense over approximately the next two years.

Cash Dividends

The following table summarizes quarterly cash dividends declared during 2018 and 2017:
2018
 
2017
Date Declared
 
Payment Date
 
Dividend Per Share
 
Date Declared
 
Payment Date
 
Dividend Per Share
11/02/18
 
02/15/19
 
$
1.07

 
10/27/17
 
02/15/18
 
$
0.71

09/07/18
 
11/15/18
 
$
0.96

 
09/08/17
 
11/15/17
 
$
0.64

06/14/18
 
08/15/18
 
$
0.96

 
06/22/17
 
08/15/17
 
$
0.64

02/15/18
 
05/15/18
 
$
0.96

 
02/16/17
 
05/15/17
 
$
0.64


Stock Repurchase Program

On February 15, 2018, AbbVie's board of directors authorized a new $10.0 billion stock repurchase program, which superseded AbbVie's previous stock repurchase program. The new stock repurchase program permits purchases of AbbVie shares from time to time in open-market or private transactions, including accelerated share repurchases, at management's discretion. The program has no time limit and can be discontinued at any time. Shares repurchased under this program are recorded at acquisition cost, including related expenses, and are available for general corporate purposes.

Under the new authorization, AbbVie repurchased 83.2 million shares for $8.5 billion during the nine months ended September 30, 2018. AbbVie's remaining stock repurchase authorization was $1.5 billion as of September 30, 2018.


2018 Form 10-Q | http://api.tenkwizard.com/cgi/image?quest=1&rid=23&ipage=12535452&doc=13
19




Prior to the new $10.0 billion authorization, AbbVie repurchased 10.9 million shares in the open market for $1.3 billion during the nine months ended September 30, 2018.

Accumulated Other Comprehensive Loss

The following table summarizes the changes in each component of accumulated other comprehensive loss, net of tax, for the nine months ended September 30, 2018:
(in millions)
Foreign
currency
translation
adjustments
 
Net investment hedging activities
 
Pension 
and post-
employment
benefits
 
Marketable
security activities
 
Cash flow hedging
activities
 
Total
Balance as of December 31, 2017
$
(439
)
 
$
(203
)
 
$
(1,919
)
 
$

 
$
(166
)
 
$
(2,727
)
Other comprehensive income (loss) before reclassifications
(250
)
 
73

 
7

 
(6
)
 
110

 
(66
)
Net losses reclassified from accumulated other comprehensive loss

 

 
92

 
4

 
138

 
234

Net current-period other comprehensive income (loss)
(250
)
 
73

 
99

 
(2
)
 
248

 
168

Balance as of September 30, 2018
$
(689
)
 
$
(130
)
 
$
(1,820
)
 
$
(2
)
 
$
82

 
$
(2,559
)

Other comprehensive income for the nine months ended September 30, 2018 included foreign currency translation adjustments totaling a loss of $250 million, which was principally due to the weakening of the Euro in the nine months ended September 30, 2018 on the translation of the company’s assets denominated in the Euro.

The following table summarizes the changes in each component of accumulated other comprehensive loss, net of tax, for the nine months ended September 30, 2017:
(in millions)
Foreign
currency
translation
adjustments
 
Net investment hedging activities
 
Pension 
and post-
employment
benefits
 
Marketable
 security activities
 
Cash flow hedging
activities
 
Total
Balance as of December 31, 2016
$
(1,435
)
 
$
140

 
$
(1,513
)
 
$
46

 
$
176

 
$
(2,586
)
Other comprehensive income (loss) before reclassifications
602

 
(307
)
 
(37
)
 
31

 
(229
)
 
60

Net losses (gains) reclassified from accumulated other comprehensive loss

 

 
58

 
(49
)
 
(96
)
 
(87
)
Net current-period other comprehensive income (loss)
602

 
(307
)
 
21

 
(18
)
 
(325
)
 
(27
)
Balance as of September 30, 2017
$
(833
)
 
$
(167
)
 
$
(1,492
)
 
$
28

 
$
(149
)
 
$
(2,613
)

Other comprehensive loss for the nine months ended September 30, 2017 included foreign currency translation adjustments totaling a gain of $602 million, which was principally due to the impact of the improvement in the Euro in the nine months ended September 30, 2017 on the translation of the company’s assets denominated in the Euro.


2018 Form 10-Q | http://api.tenkwizard.com/cgi/image?quest=1&rid=23&ipage=12535452&doc=13
20




The table below presents the impact on AbbVie’s condensed consolidated statements of earnings for significant amounts reclassified out of each component of accumulated other comprehensive loss:
 
 
Three months ended
September 30,
 
Nine months ended
September 30,
(in millions) (brackets denote gains)
 
2018
 
2017
 
2018
 
2017
Pension and post-employment benefits
 
 
 
 
 
 
 
 
Amortization of actuarial losses and other(a)
 
$
38

 
$
28

 
$
115

 
$
81

Tax benefit
 
(8
)
 
(8
)
 
(23
)
 
(23
)
Total reclassifications, net of tax
 
$
30

 
$
20

 
$
92

 
$
58

Cash flow hedging activities
 
 
 
 
 
 
 
 
Losses (gains) on designated cash flow hedges(b)
 
$
54

 
$
(38
)
 
$
144

 
$
(101
)
Tax expense (benefit)
 

 

 
(6
)
 
5

Total reclassifications, net of tax
 
$
54

 
$
(38
)
 
$
138

 
$
(96
)

(a) Amounts are included in the computation of net periodic benefit cost (see Note 10).
 
(b) Amounts are included in cost of products sold (see Note 9).
Note 12 Income Taxes
 

The effective tax rate was 1% for the three and nine months ended September 30, 2018 and 22% for the three months and 20% for the nine months ended September 30, 2017. The effective tax rate in each period differed from the U.S. statutory tax rates of 21% in 2018 and 35% in 2017, principally due to the benefit from foreign operations which reflects the impact of lower income tax rates in locations outside the United States, tax exemptions and incentives in Puerto Rico and other foreign tax jurisdictions and business development activities.

The change in the effective tax rate for both the three and nine months ended September 30, 2018 over the prior year was principally due to the effects of the enactment of the Tax Cuts and Jobs Act (the “Act”) in December 2017. The Act significantly changes the U.S. corporate tax system, reducing the U.S. federal corporate tax rate from 35% to 21%, requiring companies to pay a one-time transition tax on a mandatory deemed repatriation of earnings of certain foreign subsidiaries that were previously untaxed and creating new taxes on certain foreign sourced earnings. The Act also creates a territorial tax system that generally excludes dividends from foreign subsidiaries from U.S. taxation. Specific to 2018, there is a beneficial impact due to timing of provisions related to the earnings from certain foreign subsidiaries.

Given the complexity of the Act and anticipated guidance from the U.S. Treasury about implementing the Act, the company’s analysis and accounting for the tax effects of the enactment of the Act is preliminary. In the fourth quarter of 2017, the company recorded, as a direct result of the Act, $4.5 billion of transition tax expense, as well as $4.1 billion of net tax benefit for deferred tax remeasurement. Both of these amounts are provisional estimates, as the company has not fully completed its analysis and calculation of foreign earnings subject to the transition tax or its analysis of certain other aspects of the Act that could result in adjustments to the remeasurement of deferred tax balances. Upon completion of the analysis in 2018, these estimates may be adjusted through income tax expense in the consolidated statement of earnings. No adjustments to these provisional estimates were made during the three and nine months ended September 30, 2018. The Act also created a minimum tax on certain foreign sourced earnings. The taxability of the foreign sourced earnings and the applicable tax rates are dependent on future events. While the company is still evaluating its accounting policy for the minimum tax on foreign sourced earnings, the provisional estimates of the tax effects of the Act were reported on the basis that the minimum tax will be recognized in tax expense in the year it is incurred as a period expense.

Due to the potential for resolution of federal, state and foreign examinations and the expiration of various statutes of limitations, it is reasonably possible that the company’s gross unrecognized tax benefits balance may change within the next twelve months by up to $550 million. At the time of separation, AbbVie and Abbott Laboratories (Abbott) entered into a tax sharing agreement which provides that Abbott is liable for and has indemnified AbbVie against all income tax liabilities for periods prior to the separation. Accordingly, Abbott will indemnify and hold AbbVie harmless if the tax positions are settled for amounts in excess of recorded liabilities, and AbbVie will not benefit if prior tax positions are resolved more favorably than recorded amounts.

2018 Form 10-Q | http://api.tenkwizard.com/cgi/image?quest=1&rid=23&ipage=12535452&doc=13
21




Note 13 Legal Proceedings and Contingencies
 

AbbVie is subject to contingencies, such as various claims, legal proceedings and investigations regarding product liability, intellectual property, commercial, securities and other matters that arise in the normal course of business. Loss contingency provisions are recorded for probable losses at management’s best estimate of a loss, or when a best estimate cannot be made, a minimum loss contingency amount within a probable range is recorded. The recorded accrual balance for litigation was approximately $770 million as of September 30, 2018 and $445 million as of December 31, 2017. Initiation of new legal proceedings or a change in the status of existing proceedings may result in a change in the estimated loss accrued by AbbVie. While it is not feasible to predict the outcome of all proceedings and exposures with certainty, management believes that their ultimate disposition should not have a material adverse effect on AbbVie’s consolidated financial position, results of operations or cash flows.

Subject to certain exceptions specified in the separation agreement by and between Abbott and AbbVie, AbbVie assumed the liability for, and control of, all pending and threatened legal matters related to its business, including liabilities for any claims or legal proceedings related to products that had been part of its business, but were discontinued prior to the distribution, as well as assumed or retained liabilities, and will indemnify Abbott for any liability arising out of or resulting from such assumed legal matters.

Several pending lawsuits filed against Unimed Pharmaceuticals, Inc., Solvay Pharmaceuticals, Inc. (a company Abbott acquired in February 2010 and now known as AbbVie Products LLC) and others are consolidated for pre-trial purposes in the United States District Court for the Northern District of Georgia under the Multi-District Litigation (MDL) Rules as In re: AndroGel Antitrust Litigation, MDL No. 2084. These cases, brought by private plaintiffs and the Federal Trade Commission (FTC), generally allege Solvay's patent litigation involving AndroGel was sham litigation and the 2006 patent litigation settlement agreements and related agreements with three generic companies violate federal antitrust laws. Plaintiffs generally seek monetary damages and/or injunctive relief and attorneys' fees. These cases include: (a) four individual plaintiff lawsuits; (b) three purported class actions; and (c) Federal Trade Commission v. Actavis, Inc. et al. Following the district court's dismissal of all plaintiffs' claims, appellate proceedings led to the reinstatement of the claims regarding the patent litigation settlements, which are proceeding in the district court. In July 2018, the court denied the plaintiffs' motion for class certification.

Lawsuits are pending against AbbVie and others generally alleging that the 2005 patent litigation