Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Item 4. Controls and Procedures
Part II - Other Information
Item 1. Legal Proceedings
Item 1A. Risk Factors
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Item 6. Exhibits
Exhibits
EX-31
amgn-ex31_2019331xq1.htm
EX-32
amgn-ex32_2019331xq1.htm
Amgen Earnings 2019-03-31
AMGN 10Q Quarterly Report
Balance Sheet
Income Statement
Cash Flow
10-Q 1 amgn-2019331x10q.htm 10-Q Document
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
(Mark One)
þ
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2019
OR
¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
Commission file number 001-37702
Amgen Inc.
(Exact name of registrant as specified in its charter)
Delaware
95-3540776
(State or other jurisdiction of
incorporation or organization)
(I.R.S. Employer
Identification No.)
One Amgen Center Drive,
Thousand Oaks, California
91320-1799
(Address of principal executive offices)
(Zip Code)
(805) 447-1000
(Registrant’s telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or Section 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 þ No ¨
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes þ No ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer þ
Accelerated filer ¨
Non-accelerated filer ¨
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 þ
As of April 24, 2019, the registrant had 609,935,682 shares of common stock, $0.0001 par value, outstanding.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(In millions)
(Unaudited)
Three months ended March 31,
2019
2018
Net income
$
1,992
$
2,311
Other comprehensive income (loss), net of reclassification adjustments and taxes:
(Losses) gains on foreign currency translation
(13
)
29
Gains on cash flow hedges
45
6
Gains (losses) on available-for-sale securities
221
(343
)
Other
—
2
Other comprehensive income (loss), net of taxes
253
(306
)
Comprehensive income
$
2,245
$
2,005
See accompanying notes.
2
AMGEN INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In millions, except per-share data)
March 31, 2019
December 31, 2018
(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents
$
7,358
$
6,945
Marketable securities
18,943
22,359
Trade receivables, net
3,771
3,580
Inventories
3,016
2,940
Other current assets
2,063
1,794
Total current assets
35,151
37,618
Property, plant and equipment, net
4,892
4,958
Intangible assets, net
7,124
7,443
Goodwill
14,692
14,699
Other assets
2,138
1,698
Total assets
$
63,997
$
66,416
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable
$
1,091
$
1,207
Accrued liabilities
7,910
7,862
Current portion of long-term debt
3,705
4,419
Total current liabilities
12,706
13,488
Long-term debt
29,319
29,510
Long-term deferred tax liabilities
811
864
Long-term tax liabilities
8,869
8,770
Other noncurrent liabilities
1,460
1,284
Contingencies and commitments
Stockholders’ equity:
Common stock and additional paid-in capital; $0.0001 par value; 2,750.0 shares authorized; outstanding — 614.4 shares in 2019 and 629.6 shares in 2018
31,243
31,246
Accumulated deficit
(19,895
)
(17,977
)
Accumulated other comprehensive loss
(516
)
(769
)
Total stockholders’ equity
10,832
12,500
Total liabilities and stockholders’ equity
$
63,997
$
66,416
See accompanying notes.
3
AMGEN INC.
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(In millions, except per-share data)
(Unaudited)
Number
of shares
of common
stock
Common
stock and
additional
paid-in capital
Accumulated
deficit
Accumulated
other
comprehensive
loss
Total
Balance as of December 31, 2018
629.6
$
31,246
$
(17,977
)
$
(769
)
$
12,500
Net income
—
—
1,992
—
1,992
Other comprehensive income, net of taxes
—
—
—
253
253
Dividends declared on common stock ($1.45 per share)
—
—
(879
)
—
(879
)
Issuance of common stock in connection with the Company’s equity award programs
0.7
6
—
—
6
Stock-based compensation expense
—
64
—
—
64
Tax impact related to employee stock-based compensation expense
—
(73
)
—
—
(73
)
Repurchases of common stock
(15.9
)
—
(3,031
)
—
(3,031
)
Balance as of March 31, 2019
614.4
$
31,243
$
(19,895
)
$
(516
)
$
10,832
Number
of shares
of common
stock
Common
stock and
additional
paid-in capital
Accumulated
deficit
Accumulated
other
comprehensive
loss
Total
Balance as of December 31, 2017
722.2
$
30,992
$
(5,072
)
$
(679
)
$
25,241
Cumulative effect of changes in accounting principles, net of taxes
—
—
38
(9
)
29
Net income
—
—
2,311
—
2,311
Other comprehensive loss, net of taxes
—
—
—
(306
)
(306
)
Dividends declared on common stock ($1.32 per share)
—
—
(877
)
—
(877
)
Issuance of common stock in connection with the Company’s equity award programs
0.6
5
—
—
5
Stock-based compensation expense
—
61
—
—
61
Tax impact related to employee stock-based compensation expense
—
(57
)
—
—
(57
)
Repurchases of common stock
(56.4
)
—
(10,787
)
—
(10,787
)
Balance as of March 31, 2018
666.4
$
31,001
$
(14,387
)
$
(994
)
$
15,620
See accompanying notes.
4
AMGEN INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In millions)
(Unaudited)
Three months ended March 31,
2019
2018
Cash flows from operating activities:
Net income
$
1,992
$
2,311
Depreciation, amortization and other
495
471
Deferred income taxes
(50
)
(72
)
Other items, net
24
98
Changes in operating assets and liabilities, net of acquisition:
Trade receivables, net
(207
)
(384
)
Inventories
(28
)
(107
)
Other assets
(249
)
(135
)
Accounts payable
(112
)
(278
)
Accrued income taxes, net
277
353
Long-term tax liabilities
100
63
Other liabilities
(397
)
407
Net cash provided by operating activities
1,845
2,727
Cash flows from investing activities:
Purchases of marketable securities
(6,898
)
(2,732
)
Proceeds from sales of marketable securities
125
16,694
Proceeds from maturities of marketable securities
10,455
900
Cash acquired in acquisition, net of cash paid
—
197
Purchases of property, plant and equipment
(116
)
(155
)
Other
(11
)
2
Net cash provided by investing activities
3,555
14,906
Cash flows from financing activities:
Repayment of debt
(1,000
)
—
Repurchases of common stock
(3,032
)
(10,697
)
Dividends paid
(901
)
(951
)
Other
(54
)
(44
)
Net cash used in financing activities
(4,987
)
(11,692
)
Increase in cash and cash equivalents
413
5,941
Cash and cash equivalents at beginning of period
6,945
3,800
Cash and cash equivalents at end of period
$
7,358
$
9,741
See accompanying notes.
5
AMGEN INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2019
(Unaudited)
1. Summary of significant accounting policies
Business
Amgen Inc. (including its subsidiaries, referred to as “Amgen,” “the Company,” “we,” “our” or “us”) is a global biotechnology pioneer that discovers, develops, manufactures and delivers innovative human therapeutics. We operate in one business segment: human therapeutics.
Basis of presentation
The financial information for the three months ended March 31, 2019 and 2018, is unaudited but includes all adjustments (consisting of only normal, recurring adjustments unless otherwise indicated), which Amgen considers necessary for a fair presentation of its condensed consolidated results of operations for those periods. Interim results are not necessarily indicative of results for the full fiscal year.
The condensed consolidated financial statements should be read in conjunction with our consolidated financial statements and the notes thereto contained in our Annual Report on Form 10-K for the year ended December 31, 2018.
Principles of consolidation
The condensed consolidated financial statements include the accounts of Amgen as well as its majority-owned subsidiaries. We do not have any significant interests in any variable interest entities. All material intercompany transactions and balances have been eliminated in consolidation.
Use of estimates
The preparation of condensed consolidated financial statements in conformity with U.S. generally accepted accounting principles (GAAP) requires management to make estimates and assumptions that affect the amounts reported in the condensed consolidated financial statements and accompanying notes. Actual results may differ from those estimates.
Property, plant and equipment, net
Property, plant and equipment is recorded at historical cost, net of accumulated depreciation and amortization of $7.9 billion and $7.8 billion as of March 31, 2019 and December 31, 2018, respectively.
Leases
Adoption of new lease standard
In February 2016, the Financial Accounting Standards Board (FASB) issued a new accounting standard that amends the guidance for the accounting and disclosure of leases. This new standard requires that lessees recognize the assets and liabilities that arise from leases on the balance sheet, including leases classified as operating leases, and disclose qualitative and quantitative information about leasing arrangements. The FASB subsequently issued additional amendments to address issues arising from the implementation of the new lease standard. We adopted this standard as of January 1, 2019, using the modified-retrospective method. This approach provides a method for recording existing leases at adoption. We used the adoption date as our date of initial application, and thus comparative-period financial information is not presented for periods prior to the adoption date. In addition, we elected the package of practical expedients permitted under the transition guidance within the new standard, which, among other things, allowed us to carry forward the historical lease classification.
Adoption of the new standard resulted in total lease liabilities of $510 million and right-of-use (ROU) assets of $439 million as of January 1, 2019. The difference between the initial lease liabilities and the ROU assets is related primarily to previously existing lease liabilities. The standard did not materially impact our Condensed Consolidated Statements of Income and had no impact on our Condensed Consolidated Statements of Cash Flows. Our accounting policies under the new standard are described below. See Note 8, Leases.
Lease recognition
At inception of a contract, we determine whether an arrangement is or contains a lease. For all leases, we determine the classification as either operating or financing. Operating leases are included in Other assets, Accrued liabilities and Other noncurrent liabilities in our Condensed Consolidated Balance Sheets.
6
ROU assets represent our right to use an underlying asset for the lease term, and lease liabilities represent our obligation to make lease payments under the lease. Lease recognition occurs at the commencement date and lease liability amounts are based on the present value of lease payments over the lease term. Our lease terms may include options to extend or terminate the lease when it is reasonably certain that we will exercise that option. Because most of our leases do not provide information to determine an implicit interest rate, we use our incremental borrowing rate in determining the present value of lease payments. ROU assets also include any lease payments made prior to the commencement date and exclude lease incentives received. Operating lease expense is recognized on a straight-line basis over the lease term.
We have lease agreements with both lease and nonlease components, which are generally accounted for together as a single lease component. In addition, for certain vehicle and equipment leases, we apply a portfolio approach to determine the lease term and discount rate.
Other recent accounting pronouncements
In June 2016, the FASB issued a new accounting standard that amends the guidance for measuring and recording credit losses on financial assets measured at amortized cost by replacing the incurred-loss model with an expected-loss model. Accordingly, these financial assets will be presented at the net amount expected to be collected. This new standard also requires that credit losses related to available-for-sale debt securities be recorded as an allowance through net income rather than by reducing the carrying amount under the current, other-than-temporary-impairment model. The new standard is effective for interim and annual periods beginning on January 1, 2020, but may be adopted earlier. With certain exceptions, adjustments are to be applied using a modified-retrospective approach by reflecting adjustments through a cumulative-effect impact on retained earnings as of the beginning of the fiscal year of adoption. We are currently evaluating the impact that this new standard will have on our condensed consolidated financial statements.
2. Revenues
We operate in one business segment: human therapeutics. Therefore, results of our operations are reported on a consolidated basis for purposes of segment reporting, consistent with internal management reporting. Revenues by product and by geographic area, based on customers’ locations, are presented below. Rest-of-world (ROW) revenues relate to products that are sold primarily in Europe.
Revenues were as follows (in millions):
Three months ended March 31,
2019
2018
US
ROW
Total
US
ROW
Total
Enbrel® (etanercept)
$
1,106
$
45
$
1,151
$
1,050
$
55
$
1,105
Neulasta® (pegfilgrastim)
893
128
1,021
1,009
146
1,155
Prolia® (denosumab)
390
202
592
320
174
494
XGEVA® (denosumab)
356
115
471
332
113
445
Aranesp® (darbepoetin alfa)
182
232
414
225
229
454
KYPROLIS® (carfilzomib)
154
91
245
137
85
222
EPOGEN® (epoetin alfa)
219
—
219
244
—
244
Sensipar®/Mimpara® (cinacalcet)
135
78
213
409
88
497
Other products
556
404
960
421
306
727
Total product sales(1)
$
3,991
$
1,295
5,286
$
4,147
$
1,196
5,343
Other revenues
271
211
Total revenues
$
5,557
$
5,554
____________
(1)
Hedging gains and losses, which are included in product sales, were not material for the three months ended March 31, 2019 and 2018.
7
3. Income taxes
The effective tax rates for the three months ended March 31, 2019 and 2018, were 13.9% and 11.8%, respectively.
The increase in our effective tax rate for the three months ended March 31, 2019, was due primarily to a prior-year tax benefit associated with intercompany sales under U.S. corporate tax reform. The effective tax rates differ from the federal statutory rate primarily as a result of foreign earnings from the Company’s operations conducted in Puerto Rico, a territory of the United States that is treated as a foreign jurisdiction for U.S. tax purposes and that is subject to tax incentive grants through 2035; these earnings are subject to U.S. tax at a reduced 10.5% rate.
The U.S. territory of Puerto Rico imposes an excise tax on the gross intercompany purchase price of goods and services from our manufacturer in Puerto Rico. The rate of 4% is effective through December 31, 2027. We account for the excise tax as a manufacturing cost that is capitalized in inventory and expensed in cost of sales when the related products are sold. For U.S. income tax purposes, the excise tax results in foreign tax credits that are generally recognized in our provision for income taxes when the excise tax is incurred.
One or more of our legal entities file income tax returns in the U.S. federal jurisdiction, various U.S. state jurisdictions and certain foreign jurisdictions. Our income tax returns are routinely examined by the tax authorities in those jurisdictions. Significant disputes may arise with authorities involving issues of the timing and amount of deductions, the use of tax credits and allocations of income and expenses among various tax jurisdictions because of differing interpretations of tax laws, regulations and the interpretation of the relevant facts. As previously disclosed, we received a Revenue Agent Report (RAR) from the Internal Revenue Service (IRS) for the years 2010, 2011 and 2012. The RAR proposes to make significant adjustments that relate primarily to the allocation of profits between certain of our entities in the United States and the U.S. territory of Puerto Rico. In November 2017, we received a modified RAR that revised the IRS’s calculation but continued to propose substantial adjustments. We disagree with the proposed adjustments and are pursuing resolution with the IRS administrative appeals office, which currently has jurisdiction over the matter. If we deem necessary, we will vigorously contest the proposed adjustments through the judicial process. Final resolution of this complex matter is not likely within the next 12 months and could have a material impact on our condensed consolidated financial statements. We believe our accrual for income tax liabilities is appropriate based on past experience, interpretations of tax law, and judgments about potential actions by tax authorities; however, due to the complexity of the provision for income taxes, the ultimate resolution of any tax matters may result in payments greater or less than amounts accrued. We are no longer subject to U.S. federal income tax examinations for years ended on or before December 31, 2009. In addition, we are currently under examination by a number of other state and foreign tax jurisdictions.
During the three months ended March 31, 2019, the gross amounts of our unrecognized tax benefits (UTBs) increased $90 million as a result of tax positions taken during the current year. Substantially all of the UTBs as of March 31, 2019, if recognized, would affect our effective tax rate.
8
4. Earnings per share
The computation of basic earnings per share (EPS) is based on the weighted-average number of our common shares outstanding. The computation of diluted EPS is based on the weighted-average number of our common shares outstanding and dilutive potential common shares, which include primarily shares that may be issued under our stock option, restricted stock and performance unit award programs (collectively, dilutive securities), as determined by using the treasury stock method.
The computations for basic and diluted EPS were as follows (in millions, except per-share data):
Three months ended March 31,
2019
2018
Income (Numerator):
Net income for basic and diluted EPS
$
1,992
$
2,311
Shares (Denominator):
Weighted-average shares for basic EPS
622
707
Effect of dilutive securities
4
4
Weighted-average shares for diluted EPS
626
711
Basic EPS
$
3.20
$
3.27
Diluted EPS
$
3.18
$
3.25
For the three months ended March 31, 2019 and 2018, the number of antidilutive employee stock-based awards excluded from the computation of diluted EPS was not significant.
5. Investments
Available-for-sale investments
The amortized cost, gross unrealized gains, gross unrealized losses and fair values of interest-bearing securities, which are considered available-for-sale, by type of security were as follows (in millions):
Types of securities as of March 31, 2019
Amortized
cost
Gross
unrealized
gains
Gross
unrealized
losses
Fair
values
U.S. Treasury notes
$
2,709
$
—
$
(27
)
$
2,682
U.S. Treasury bills
3,475
—
—
3,475
Other government-related debt securities:
U.S.
112
—
(1
)
111
Foreign and other
964
4
(10
)
958
Corporate debt securities:
Financial
2,771
1
(22
)
2,750
Industrial
2,481
4
(27
)
2,458
Other
572
1
(7
)
566
Residential-mortgage-backed securities
1,404
—
(22
)
1,382
Other mortgage- and asset-backed securities
478
—
(11
)
467
Money market mutual funds
4,375
—
—
4,375
Other short-term interest-bearing securities
6,428
—
—
6,428
Total interest-bearing securities
$
25,769
$
10
$
(127
)
$
25,652
9
Types of securities as of December 31, 2018
Amortized
cost
Gross
unrealized
gains
Gross
unrealized
losses
Fair
values
U.S. Treasury notes
$
2,710
$
—
$
(47
)
$
2,663
U.S. Treasury bills
8,191
—
—
8,191
Other government-related debt securities:
U.S.
112
—
(2
)
110
Foreign and other
972
1
(41
)
932
Corporate debt securities:
Financial
2,778
—
(81
)
2,697
Industrial
2,603
—
(99
)
2,504
Other
583
—
(21
)
562
Residential-mortgage-backed securities
1,458
—
(36
)
1,422
Other mortgage- and asset-backed securities
483
—
(14
)
469
Money market mutual funds
5,659
—
—
5,659
Other short-term interest-bearing securities
3,515
—
—
3,515
Total interest-bearing securities
$
29,064
$
1
$
(341
)
$
28,724
The fair values of interest-bearing securities by location in the Condensed Consolidated Balance Sheets were as follows (in millions):
Condensed Consolidated Balance Sheets locations
March 31, 2019
December 31, 2018
Cash and cash equivalents
$
6,709
$
6,365
Marketable securities
18,943
22,359
Total interest-bearing securities
$
25,652
$
28,724
Cash and cash equivalents in the above table excludes bank account cash of $649 million and $580 million as of March 31, 2019 and December 31, 2018, respectively.
The fair values of interest-bearing securities by contractual maturity, except for mortgage- and asset-backed securities that do not have a single maturity date, were as follows (in millions):
Contractual maturities
March 31, 2019
December 31, 2018
Maturing in one year or less
$
14,357
$
17,424
Maturing after one year through three years
4,600
3,356
Maturing after three years through five years
3,987
5,168
Maturing after five years through ten years
859
885
Mortgage- and asset-backed securities
1,849
1,891
Total interest-bearing securities
$
25,652
$
28,724
For the three months ended March 31, 2019 and 2018, realized gains on interest-bearing securities were $1 million and $17 million, respectively, and realized losses on interest-bearing securities were $5 million and $151 million, respectively. Realized gains and losses on interest-bearing securities are recorded in Interest and other income, net, in the Condensed Consolidated Statements of Income. The cost of securities sold is based on the specific-identification method.
10
The fair values and gross unrealized losses of interest-bearing securities in an unrealized loss position aggregated by type and length of time that the securities have been in a continuous loss position were as follows (in millions):
Less than 12 months
12 months or more
Types of securities as of March 31, 2019
Fair values
Unrealized losses
Fair values
Unrealized losses
U.S. Treasury notes
$
1,190
$
(11
)
$
1,452
$
(16
)
Other government-related debt securities:
U.S.
—
—
111
(1
)
Foreign and other
410
(6
)
307
(4
)
Corporate debt securities:
Financial
1,783
(14
)
822
(8
)
Industrial
1,516
(20
)
634
(7
)
Other
454
(6
)
36
(1
)
Residential-mortgage-backed securities
558
(9
)
809
(13
)
Other mortgage- and asset-backed securities
17
—
450
(11
)
Total
$
5,928
$
(66
)
$
4,621
$
(61
)
Less than 12 months
12 months or more
Types of securities as of December 31, 2018
Fair values
Unrealized losses
Fair values
Unrealized losses
U.S. Treasury notes
$
1,219
$
(21
)
$
1,444
$
(26
)
Other government-related debt securities:
U.S.
—
—
110
(2
)
Foreign and other
631
(31
)
240
(10
)
Corporate debt securities:
Financial
1,968
(59
)
718
(22
)
Industrial
1,898
(81
)
529
(18
)
Other
529
(20
)
28
(1
)
Residential-mortgage-backed securities
576
(14
)
840
(22
)
Other mortgage- and asset-backed securities
17
—
451
(14
)
Total
$
6,838
$
(226
)
$
4,360
$
(115
)
The primary objective of our investment portfolio is to enhance overall returns in an efficient manner while maintaining safety of principal, prudent levels of liquidity and acceptable levels of risk. Our investment policy limits interest-bearing security investments to certain types of debt and money market instruments issued by institutions with primarily investment-grade credit ratings, and it places restrictions on maturities and concentration by asset class and issuer.
We review our available-for-sale investments for other-than-temporary declines in fair value below our cost basis each quarter and whenever events or changes in circumstances indicate that the cost basis of an asset may not be recoverable. The evaluation is based on a number of factors, including the length of time and the extent to which the fair value has been below our cost basis as well as adverse conditions related specifically to the security, such as any changes to the credit rating of the security and the intent to sell or whether we will more likely than not be required to sell the security before recovery of its amortized cost basis. Our assessment of whether a security is other-than-temporarily impaired could change in the future based on new developments or changes in assumptions related to that particular security. As of March 31, 2019, unrealized losses on available-for-sale investments were due primarily to higher interest rates than at the time the securities were purchased. As of March 31, 2019 and December 31, 2018, we believe the cost bases for our available-for-sale investments were recoverable in all material respects.
Equity securities
We held investments in equity securities with readily determinable fair values of $246 million and $176 million as of March 31, 2019 and December 31, 2018, respectively, which are included in Other assets in the Condensed Consolidated Balance Sheets. Gains and losses recognized on equity securities with readily determinable fair values, including gains and losses recognized on sales, were not material for the three months ended March 31, 2019 and 2018.
11
As of March 31, 2019 and December 31, 2018, respectively, we held investments of $185 million and $222 million in equity securities without readily determinable fair values, which are included in Other assets in the Condensed Consolidated Balance Sheets. Adjustments to the carrying values of these securities were not material for the three months ended March 31, 2019 and 2018.
Limited partnership investments
We held limited partnership investments of $275 million and $285 million as of March 31, 2019 and December 31, 2018, respectively, which are included in Other assets in the Condensed Consolidated Balance Sheets. These investments are measured by using the net asset values of the underlying investments as a practical expedient. These investments are typically redeemable only through distributions upon liquidation of the underlying assets. As of March 31, 2019, unfunded additional commitments to be made during the next several years for these investments were not material. Gains and losses recognized on our limited partnership investments were not material for the three months ended March 31, 2019 and 2018.
6. Inventories
Inventories consisted of the following (in millions):
March 31, 2019
December 31, 2018
Raw materials
$
276
$
257
Work in process
1,770
1,660
Finished goods
970
1,023
Total inventories
$
3,016
$
2,940
7. Goodwill and other intangible assets
Goodwill
The change in the carrying amount of goodwill was as follows (in millions):
Three months ended March 31, 2019
Beginning balance
$
14,699
Currency translation adjustment
(7
)
Ending balance
$
14,692
Other intangible assets
Other intangible assets consisted of the following (in millions):
March 31, 2019
December 31, 2018
Gross
carrying
amounts
Accumulated
amortization
Other intangible
assets, net
Gross
carrying
amounts
Accumulated
amortization
Other intangible
assets, net
Finite-lived intangible assets:
Developed-product-technology rights
$
12,559
$
(7,639
)
$
4,920
$
12,573
$
(7,479
)
$
5,094
Licensing rights
3,693
(2,064
)
1,629
3,772
(2,032
)
1,740
Marketing-related rights
1,211
(947
)
264
1,297
(1,019
)
278
Research and development technology rights
1,145
(889
)
256
1,148
(872
)
276
Total finite-lived intangible assets
18,608
(11,539
)
7,069
18,790
(11,402
)
7,388
Indefinite-lived intangible assets:
In-process research and development
55
—
55
55
—
55
Total other intangible assets
$
18,663
$
(11,539
)
$
7,124
$
18,845
$
(11,402
)
$
7,443
12
Developed-product-technology rights consist of rights related to marketed products acquired in business combinations. Licensing rights consist primarily of contractual rights acquired in business combinations to receive future milestone, royalty and profit-sharing payments; capitalized payments to third parties for milestones related to regulatory approvals to commercialize products; and upfront payments associated with royalty obligations for marketed products. Marketing-related rights consist primarily of rights related to the sale and distribution of marketed products. Research and development (R&D) technology rights pertain to technology used in R&D that have alternative future uses.
In-process research and development (IPR&D) consists of R&D projects acquired in a business combination that are not complete at the time of acquisition due to remaining technological risks and/or lack of receipt of required regulatory approvals. We review IPR&D projects for impairment annually, whenever events or changes in circumstances indicate that the carrying amounts may not be recoverable and upon the establishment of technological feasibility or regulatory approval.
During the three months ended March 31, 2019 and 2018, we recognized amortization associated with our finite-lived intangible assets, included primarily in Cost of sales in the Condensed Consolidated Statements of Income, of $315 million and $320 million, respectively. The total estimated amortization for our finite-lived intangible assets for the remaining nine months ending December 31, 2019, and the years ending December 31, 2020, 2021, 2022, 2023 and 2024, are $1.0 billion, $1.2 billion, $1.0 billion, $0.9 billion, $0.9 billion and $0.8 billion, respectively.
8. Leases
On January 1, 2019, we adopted a new accounting standard that amends the guidance for the accounting and reporting of leases. Certain required disclosures have been made on a prospective basis in accordance with the guidance of the standard. See Note 1, Summary of significant accounting policies.
We lease certain facilities and equipment related primarily to administrative, R&D and sales and marketing activities. Leases with lease terms of 12 months or less are expensed on a straight-line basis over the lease term and are not recorded in the Condensed Consolidated Balance Sheets.
Most leases include one or more options to renew, with renewal terms that can extend the lease term up to seven years. The exercise of lease renewal options is at our sole discretion. In addition, some of our lease agreements include rental payments adjusted periodically for inflation. Our lease agreements neither contain any residual value guarantees nor impose any significant restrictions or covenants. We sublease certain real estate to third parties. Our sublease portfolio consists of operating leases from former R&D and administrative space.
The following table summarizes information related to our leases, which are all classified as operating, included in our Condensed Consolidated Balance Sheets (in millions):
Condensed Consolidated Balance Sheets locations
March 31, 2019
Assets:
Other assets
$
417
Liabilities:
Accrued liabilities
$
120
Other noncurrent liabilities
368
Total lease liabilities
$
488
The components of net lease costs were as follows (in millions):
Lease costs
Three months ended March 31, 2019
Operating(1)
$
48
Sublease income
(8
)
Total net lease costs
$
40
____________
(1)
Includes short-term leases and variable lease costs, which were not material for the three months ended March 31, 2019.
13
Maturities of lease liabilities as of March 31, 2019, were as follows (in millions):
Maturity dates
Operating leases
Remaining nine months ending December 31, 2019
$
135
2020
133
2021
107
2022
63
2023
48
Thereafter
41
Total lease payments(1)
527
Less imputed interest
(39
)
Present value of lease liabilities
$
488
____________
(1)
Includes future rental commitments for abandoned leases of $204 million. We expect to receive total future rental income of $166 million related to noncancelable subleases for abandoned facilities.
The weighted-average remaining lease term and weighted-average discount rate of our leases were 4.5 years and 3.32%, respectively, as of March 31, 2019.
Cash and noncash information related to our leases was as follows (in millions):
Three months ended March 31, 2019
Cash paid for amounts included in the measurement of lease liabilities:
Operating cash flows from operating leases
$
34
ROU assets obtained in exchange for lease obligations:
Operating leases
$
8
14
9. Financing arrangements
Our borrowings consisted of the following (in millions):
March 31, 2019
December 31, 2018
5.70% notes due 2019 (5.70% 2019 Notes)
$
—
$
1,000
1.90% notes due 2019 (1.90% 2019 Notes)
700
700
Floating Rate Notes due 2019
550
550
2.20% notes due 2019 (2.20% 2019 Notes)
1,400
1,400
2.125% €675 million notes due 2019 (2.125% 2019 euro Notes)
757
774
4.50% notes due 2020 (4.50% 2020 Notes)
300
300
2.125% notes due 2020 (2.125% 2020 Notes)
750
750
Floating Rate Notes due 2020
300
300
2.20% notes due 2020 (2.20% 2020 Notes)
700
700
3.45% notes due 2020 (3.45% 2020 Notes)
900
900
4.10% notes due 2021 (4.10% 2021 Notes)
1,000
1,000
1.85% notes due 2021 (1.85% 2021 Notes)
750
750
3.875% notes due 2021 (3.875% 2021 Notes)
1,750
1,750
1.25% €1,250 million notes due 2022 (1.25% 2022 euro Notes)
1,402
1,433
2.70% notes due 2022 (2.70% 2022 Notes)
500
500
2.65% notes due 2022 (2.65% 2022 Notes)
1,500
1,500
3.625% notes due 2022 (3.625% 2022 Notes)
750
750
0.41% CHF700 million bonds due 2023 (0.41% 2023 Swiss franc Bonds)
703
713
2.25% notes due 2023 (2.25% 2023 Notes)
750
750
3.625% notes due 2024 (3.625% 2024 Notes)
1,400
1,400
3.125% notes due 2025 (3.125% 2025 Notes)
1,000
1,000
2.00% €750 million notes due 2026 (2.00% 2026 euro Notes)
841
860
2.60% notes due 2026 (2.60% 2026 Notes)
1,250
1,250
5.50% £475 million notes due 2026 (5.50% 2026 pound sterling Notes)
619
606
3.20% notes due 2027 (3.20% 2027 Notes)
1,000
1,000
4.00% £700 million notes due 2029 (4.00% 2029 pound sterling Notes)
912
893
6.375% notes due 2037 (6.375% 2037 Notes)
552
552
6.90% notes due 2038 (6.90% 2038 Notes)
291
291
6.40% notes due 2039 (6.40% 2039 Notes)
466
466
5.75% notes due 2040 (5.75% 2040 Notes)
412
412
4.95% notes due 2041 (4.95% 2041 Notes)
600
600
5.15% notes due 2041 (5.15% 2041 Notes)
974
974
5.65% notes due 2042 (5.65% 2042 Notes)
487
487
5.375% notes due 2043 (5.375% 2043 Notes)
261
261
4.40% notes due 2045 (4.40% 2045 Notes)
2,250
2,250
4.563% notes due 2048 (4.563% 2048 Notes)
1,415
1,415
4.663% notes due 2051 (4.663% 2051 Notes)
3,541
3,541
Other notes due 2097
100
100
Unamortized bond discounts, premiums and issuance costs, net
(886
)
(896
)
Fair value adjustments
77
(53
)
Total carrying value of debt
33,024
33,929
Less current portion
(3,705
)
(4,419
)
Total long-term debt
$
29,319
$
29,510
There are no material differences between the effective interest rates and coupon rates of any of our borrowings, except for the 4.563% 2048 Notes and the 4.663% 2051 Notes, which have effective interest rates of 6.3% and 5.6%, respectively.
15
10. Stockholders’ equity
Stock repurchase program
Activity under our stock repurchase program, on a trade date basis, was as follows (in millions):
2019
2018
Shares
Dollars
Shares
Dollars
First quarter
15.9
$
3,031
56.4
$
10,787
As of March 31, 2019, $2.1 billion of authority remained available under our stock repurchase program.
Dividends
In March 2019, the Board of Directors declared a quarterly cash dividend of $1.45 per share, which will be paid in June 2019. In December 2018, the Board of Directors declared a quarterly cash dividend of $1.45 per share, which was paid in March 2019.
Accumulated other comprehensive income (loss)
The components of Accumulated other comprehensive income (loss) (AOCI) were as follows (in millions):
Foreign
currency
translation
Cash flow
hedges
Available-for-sale
securities
Other
AOCI
Balance as of December 31, 2018
$
(670
)
$
241
$
(338
)
$
(2
)
$
(769
)
Foreign currency translation adjustments
(13
)
—
—
—
(13
)
Unrealized gains
—
30
218
—
248
Reclassification adjustments to income
—
28
4
—
32
Income taxes
—
(13
)
(1
)
—
(14
)
Balance as of March 31, 2019
$
(683
)
$
286
$
(117
)
$
(2
)
$
(516
)
Reclassifications out of AOCI and into earnings were as follows (in millions):
Three months ended March 31,
Components of AOCI
2019
2018
Condensed Consolidated
Statements of Income locations
Cash flow hedges:
Foreign currency contract gains (losses)
$
14
$
(34
)
Product sales
Cross-currency swap contract (losses) gains
(42
)
164
Interest and other income, net
(28
)
130
Income before income taxes
6
(28
)
Provision for income taxes
$
(22
)
$
102
Net income
Available-for-sale securities:
Net realized losses
$
(4
)
$
(134
)
Interest and other income, net
—
1
Provision for income taxes
$
(4
)
$
(133
)
Net income
16
11. Fair value measurement
To estimate the fair value of our financial assets and liabilities, we use valuation approaches within a hierarchy that maximizes the use of observable inputs and minimizes the use of unobservable inputs by requiring that observable inputs be used when available. Observable inputs are inputs that market participants would use in pricing an asset or liability based on market data obtained from sources independent of the Company. Unobservable inputs are inputs that reflect the Company’s assumptions about the inputs that market participants would use in pricing an asset or liability and are developed based on the best information available in the circumstances. The fair value hierarchy is divided into three levels based on the source of inputs as follows:
Level 1
—
Valuations based on unadjusted quoted prices in active markets for identical assets or liabilities that the Company has the ability to access
Level 2
—
Valuations for which all significant inputs are observable either directly or indirectly—other than Level 1 inputs
Level 3
—
Valuations based on inputs that are unobservable and significant to the overall fair value measurement
The availability of observable inputs can vary among the various types of financial assets and liabilities. To the extent that the valuation is based on models or inputs that are less observable or unobservable in the market, the determination of fair value requires more judgment. In certain cases, the inputs used for measuring fair value may fall into different levels of the fair value hierarchy. In such cases, for financial statement disclosure purposes, the level in the fair value hierarchy within which the fair value measurement is categorized is based on the lowest level of input used that is significant to the overall fair value measurement.
The fair values of each major class of the Company’s financial assets and liabilities measured at fair value on a recurring basis were as follows (in millions):
Quoted prices in active markets for identical assets (Level 1)
Significant
other observable
inputs
(Level 2)
Significant
unobservable
inputs
(Level 3)
Fair value measurement as of March 31, 2019, using:
Total
Assets:
Interest-bearing securities:
U.S. Treasury notes
$
2,682
$
—
$
—
$
2,682
U.S. Treasury bills
3,475
—
—
3,475
Other government-related debt securities:
U.S.
—
111
—
111
Foreign and other
—
958
—
958
Corporate debt securities:
Financial
—
2,750
—
2,750
Industrial
—
2,458
—
2,458
Other
—
566
—
566
Residential-mortgage-backed securities
—
1,382
—
1,382
Other mortgage- and asset-backed securities
—
467
—
467
Money market mutual funds
4,375
—
—
4,375
Other short-term interest-bearing securities
—
6,428
—
6,428
Equity securities
246
—
—
246
Derivatives:
Foreign currency contracts
—
238
—
238
Cross-currency swap contracts
—
143
—
143
Interest rate swap contracts
—
94
—
94
Total assets
$
10,778
$
15,595
$
—
$
26,373
Liabilities:
Derivatives:
Foreign currency contracts
$
—
$
8
$
—
$
8
Cross-currency swap contracts
—
429
—
429
Interest rate swap contracts
—
54
—
54
Contingent consideration obligations
—
—
66
66
Total liabilities
$
—
$
491
$
66
$
557
17
Quoted prices in
active markets for
identical assets
(Level 1)
Significant
other observable
inputs
(Level 2)
Significant
unobservable
inputs
(Level 3)
Fair value measurement as of December 31, 2018, using:
Total
Assets:
Interest-bearing securities:
U.S. Treasury notes
$
2,663
$
—
$
—
$
2,663
U.S. Treasury bills
8,191
—
—
8,191
Other government-related debt securities:
U.S.
—
110
—
110
Foreign and other
—
932
—
932
Corporate debt securities:
Financial
—
2,697
—
2,697
Industrial
—
2,504
—
2,504
Other
—
562
—
562
Residential-mortgage-backed securities
—
1,422
—
1,422
Other mortgage- and asset-backed securities
—
469
—
469
Money market mutual funds
5,659
—
—
5,659
Other short-term interest-bearing securities
—
3,515
—
3,515
Equity securities
176
—
—
176
Derivatives:
Foreign currency contracts
—
182
—
182
Cross-currency swap contracts
—
170
—
170
Interest rate swap contracts
—
56
—
56
Total assets
$
16,689
$
12,619
$
—
$
29,308
Liabilities:
Derivatives:
Foreign currency contracts
$
—
$
26
$
—
$
26
Cross-currency swap contracts
—
401
—
401
Interest rate swap contracts
—
149
—
149
Contingent consideration obligations
—
—
72
72
Total liabilities
$
—
$
576
$
72
$
648
Interest-bearing and equity securities
The fair values of our U.S. Treasury securities, money market mutual funds and equity securities are based on quoted market prices in active markets, with no valuation adjustment.
Most of our other government-related and corporate debt securities are investment grade and have maturity dates of five years or less from the balance sheet date. Our other government-related debt securities portfolio is composed of securities with weighted-average credit ratings of A– or equivalent by Standard & Poor’s Financial Services LLC (S&P), Moody’s Investors Service, Inc. (Moody’s), or Fitch Ratings, Inc. (Fitch); and our corporate debt securities portfolio has weighted-average credit ratings of A– or equivalent by Fitch and BBB + or equivalent by S&P or Moody’s. We estimate the fair values of these securities by taking into consideration valuations obtained from third-party pricing services. The pricing services use industry-standard valuation models, including both income- and market-based approaches, for which all significant inputs are observable either directly or indirectly to estimate fair value. The inputs include reported trades of and broker-dealer quotes on the same or similar securities; issuer credit spreads; benchmark securities; and other observable inputs.
Our residential-mortgage-, other-mortgage- and asset-backed-securities portfolio is composed entirely of senior tranches with credit ratings of AAA by S&P, Moody’s or Fitch. We estimate the fair values of these securities by taking into consideration valuations obtained from third-party pricing services. The pricing services use industry-standard valuation models, including both income- and market-based approaches, for which all significant inputs are observable either directly or indirectly to estimate fair value. The inputs include reported trades of and broker-dealer quotes on the same or similar securities; issuer credit spreads; benchmark securities; prepayment or default projections based on historical data; and other observable inputs.
We value our other short-term interest-bearing securities at amortized cost, which approximates fair value given their near-term maturity dates.
18
Derivatives
All of our foreign currency forward and option derivative contracts have maturities of three years or less, and all are with counterparties that have minimum credit ratings of A– or equivalent by S&P, Moody’s or Fitch. We estimate the fair values of these contracts by taking into consideration valuations obtained from a third-party valuation service that uses an income-based industry-standard valuation model for which all significant inputs are observable either directly or indirectly. These inputs include foreign currency exchange rates, the London Interbank Offered Rate (LIBOR), swap rates and obligor credit default swap rates. In addition, inputs for our foreign currency option contracts include implied volatility measures. These inputs, when applicable, are at commonly quoted intervals. See Note 12, Derivative instruments.
Our cross-currency swap contracts are with counterparties that have minimum credit ratings of A– or equivalent by S&P, Moody’s or Fitch. We estimate the fair values of these contracts by taking into consideration valuations obtained from a third-party valuation service that uses an income-based industry-standard valuation model for which all significant inputs are observable either directly or indirectly. These inputs include foreign currency exchange rates, LIBOR, swap rates, obligor credit default swap rates and cross-currency-basis swap spreads. See Note 12, Derivative instruments.
Our interest rate swap contracts are with counterparties that have minimum credit ratings of A– or equivalent by S&P, Moody’s or Fitch. We estimate the fair values of these contracts by using an income-based industry-standard valuation model for which all significant inputs are observable either directly or indirectly. These inputs include LIBOR, swap rates and obligor credit default swap rates. See Note 12, Derivative instruments.
Contingent consideration obligations
As a result of our business acquisitions, we have incurred contingent consideration obligations. The contingent consideration obligations are recorded at their fair values by using probability-adjusted discounted cash flows, and we revalue these obligations each reporting period until the related contingencies have been resolved. The fair value measurements of these obligations are based on significant unobservable inputs related to licensing rights and product candidates acquired in business combinations, and they are reviewed quarterly by management in our R&D and commercial sales organizations. These inputs include, as applicable, estimated probabilities and the timing of achieving specified regulatory and commercial milestones as well as estimated annual sales. Significant changes that increase or decrease the probabilities of achieving the related regulatory and commercial events or that shorten or lengthen the time required to achieve such events or that increase or decrease estimated annual sales would result in corresponding increases or decreases in the fair values of the obligations, as applicable. Changes in the fair values of contingent consideration obligations are recognized in Other operating expenses in the Condensed Consolidated Statements of Income. Changes in the carrying amounts of contingent consideration obligations for the three months ended March 31, 2019 and 2018 were not material.
During the three months ended March 31, 2019 and 2018, there were no transfers of assets or liabilities between fair value measurement levels, and there were no material remeasurements to the fair values of assets and liabilities that are not measured at fair value on a recurring basis.
Summary of the fair values of other financial instruments
Cash equivalents
The fair values of cash equivalents approximate their carrying values due to the short-term nature of such financial instruments.
Borrowings
We estimated the fair values of our borrowings by using Level 2 inputs. As of March 31, 2019 and December 31, 2018, the aggregate fair values of our borrowings were $34.8 billion and $35.0 billion, respectively, and the carrying values were $33.0 billion and $33.9 billion, respectively.
19
12. Derivative instruments
The Company is exposed to foreign currency exchange rate and interest rate risks related to its business operations. To reduce our risks related to such exposures, we use or have used certain derivative instruments, including foreign currency forward, foreign currency option, cross-currency swap, forward interest rate and interest rate swap contracts. We do not use derivatives for speculative trading purposes.
Cash flow hedges
We are exposed to possible changes in the values of certain anticipated foreign currency cash flows resulting from changes in foreign currency exchange rates associated primarily with our euro-denominated international product sales. Increases and decreases in the cash flows associated with our international product sales due to movements in foreign currency exchange rates are offset partially by corresponding increases and decreases in the cash flows from our international operating expenses resulting from these foreign currency exchange rate movements. To further reduce our exposure to foreign currency exchange rate fluctuations with regard to our international product sales, we enter into foreign currency forward and option contracts to hedge a portion of our projected international product sales primarily over a three-year time horizon, with, at any given point in time, a higher percentage of nearer-term projected product sales being hedged than in successive periods.
As of both March 31, 2019 and December 31, 2018, we had outstanding foreign currency forward contracts with aggregate notional amounts of $4.5 billion and outstanding foreign currency option contracts with aggregate notional amounts of $21 million. We have designated these foreign currency forward and foreign currency option contracts, which are primarily euro based, as cash flow hedges. Accordingly, we report the unrealized gains and losses on these contracts in AOCI in the Condensed Consolidated Balance Sheets, and we reclassify them to Product sales in the Condensed Consolidated Statements of Income in the same periods during which the hedged transactions affect earnings.
To hedge our exposure to foreign currency exchange rate risk associated with certain of our long-term debt denominated in foreign currencies, we enter into cross-currency swap contracts. Under the terms of such contracts, we paid euros, pounds sterling and Swiss francs and received U.S. dollars for the notional amounts at the inception of the contracts; and based on these notional amounts, we exchange interest payments at fixed rates over the lives of the contracts by paying U.S. dollars and receiving euros, pounds sterling and Swiss francs. In addition, we will pay U.S. dollars to and receive euros, pounds sterling and Swiss francs from the counterparties at the maturities of the contracts for these same notional amounts. The terms of these contracts correspond to the related hedged debt, thereby effectively converting the interest payments and principal repayment on the debt from euros, pounds sterling and Swiss francs to U.S. dollars. We have designated these cross-currency swap contracts as cash flow hedges. Accordingly, the unrealized gains and losses on these contracts are reported in AOCI in the Condensed Consolidated Balance Sheets and reclassified to Interest and other income, net, in the Condensed Consolidated Statements of Income in the same periods during which the hedged debt affects earnings.
The notional amounts and interest rates of our cross-currency swaps as of March 31, 2019, were as follows (notional amounts in millions):
Foreign currency
U.S. dollars
Hedged notes
Notional amounts
Interest rates
Notional amounts
Interest rates
2.125% 2019 euro Notes
€
675
2.1
%
$
864
2.6
%
1.25% 2022 euro Notes
€
1,250
1.3
%
$
1,388
3.2
%
0.41% 2023 Swiss franc Bonds
CHF
700
0.4
%
$
704
3.4
%
2.00% 2026 euro Notes
€
750
2.0
%
$
833
3.9
%
5.50% 2026 pound sterling Notes
£
475
5.5
%
$
747
6.0
%
4.00% 2029 pound sterling Notes
£
700
4.0
%
$
1,111
4.5
%
In connection with the anticipated issuance of long-term fixed-rate debt, we occasionally enter into forward interest rate contracts in order to hedge the variability in cash flows due to changes in the applicable U.S. Treasury rate between the time we enter into these contracts and the time the related debt is issued. Gains and losses on forward interest rate contracts, which are designated as cash flow hedges, are recognized in AOCI in the Condensed Consolidated Balance Sheets and are amortized into Interest expense, net, in the Condensed Consolidated Statements of Income over the lives of the associated debt issuances. Amounts recognized in connection with forward interest rate swaps during the three months ended March 31, 2019, and amounts expected to be recognized during the subsequent 12 months are not material.
20
The unrealized gains and losses recognized in AOCI for our derivative instruments designated as cash flow hedges were as follows (in millions):