ABBOTT LABORATORIES

In February 2016, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2016-02, Leases, which requires lessees to measure and recognize a lease asset and liability on the balance sheet for most leases, including operating leases.  Abbott adopted the new standard as of January 1, 2019 using the modified retrospective approach and applied the standard’s transition provisions as of January 1, 2019.  As a result, no changes were made to the December 31, 2018 Consolidated Balance Sheet. Abbott elected to apply the package of practical expedients related to transition. These practical expedients allowed Abbott to carry forward its historical assessments of whether any existing contracts are or contain leases, the lease classification for each lease existing at January 1, 2019, and whether any initial direct costs for such leases qualified for capitalization.

The new lease accounting standard does not have a material impact on the amounts reported in the Condensed Consolidated Statement of Earnings but does have a material impact on the amounts reported in the Condensed Consolidated Balance Sheet.  Adoption of the new standard resulted in the recording of approximately $850 million of new right of use (ROU) assets and additional liabilities for operating leases on the Condensed Consolidated Balance Sheet as of January 1, 2019.

Certain assets, primarily Diagnostics instruments, are leased to customers under contractual arrangements that typically include an operating or sales-type lease as well as performance obligations for reagents and other consumables. Sales-type leases are not significant. Contract terms vary by customer and may include options to terminate the contract or options to extend the contract. Where instruments are provided under operating lease arrangements, some portion or the entire lease revenue may be variable and subject to subsequent non-lease component (e.g. reagent) sales. The allocation of revenue between the lease and non-lease components is based on stand-alone selling prices. Operating lease revenue represented less than 3 percent of Abbott’s total net sales in the first quarter of 2019.

Taxes on earnings from continuing operations reflect the estimated annual effective rates and include charges for interest and penalties.  In the first three months of 2019, taxes on earnings from continuing operations include a $78 million reduction to the transition tax related to the Tax Cut and Jobs Act (TCJA) and approximately $65 million in excess tax benefits associated with share-based compensation. The $78 million reduction to the transition tax liability was the result of the issuance of final transition tax regulations by the U.S. Department of Treasury in the quarter.  This adjustment decreased the cumulative net tax expense related to the TCJA to $1.51 billion.  In the first three months of 2018, taxes on earnings from continuing operations include approximately $65 million in excess tax benefits associated with share-based compensation and a $15 million adjustment to the transition tax liability for associated effects related to state tax.  Earnings from discontinued operations, net of tax, in the first three months of 2018 reflect the recognition of $9 million of net tax benefits primarily as a result of the resolution of various tax positions related to prior years which decreased the gross amount of unrecognized tax benefits by $16 million.

In Vascular, excluding the effect of foreign exchange, revenues were basically flat as the 1.6 percent increase in coronary and endovascular product sales, which includes drug-eluting stents, balloon catheters, guidewires, vascular imaging/diagnostics products, vessel closure, carotid and other coronary and peripheral products, was offset primarily by a reduction in royalty revenue.  In Rhythm Management, the 5.2 percent decline in revenues, excluding the effect of foreign exchange, reflects an 11.6 percent decrease in U.S. sales partially offset by a 1.0 percent increase in international sales.  The 7.1 percent decline in Neuromodulation sales, excluding the effect of foreign exchange, reflects a 9.6 percent decline in U.S. sales partially offset by international growth of 2.1 percent.

In the Condensed Consolidated Statement of Cash Flows, Net cash from operating activities for the first three months of 2019 totaled $712 million, a decrease of $396 million over the prior year due primarily to the timing of $313 million of pension contributions in 2019 and an increased investment in working capital partially offset by higher operating earnings. Other, net in Net cash from operating activities for the first three months of 2019 was a use of $483 million and includes $313 million of pension contributions and the payment of cash taxes of approximately $185 million.  Other, net in Net cash from operating activities for the first three months of 2018 was a use of $182 million and includes the impact of approximately $220 million of cash taxes paid. Other, net in Net cash from operating activities for the first three months of 2018 also includes $14 million of pension contributions as a pension contribution of $270 million was made in December 2017.