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ALLERGAN INC - 10-Q - Management's Discussion and Analysis of Financial Condition and Results of Operations(Edgar Glimpses Via Acquire Media NewsEdge) This financial review presents our operating results for the three and nine month periods ended September 30, 2014 and 2013, and our financial condition at September 30, 2014. The following discussion contains forward-looking statements which are subject to known and unknown risks, uncertainties and other factors that may cause our actual results to differ materially from those expressed or implied by such forward-looking statements. We discuss such risks, uncertainties and other factors throughout this report and specifically under the caption "Risk Factors" in Part II, Item 1A below. The following review should be read in connection with the information presented in our unaudited condensed consolidated financial statements and related notes for the three and nine month periods ended September 30, 2014 included in this report and our audited consolidated financial statements and related notes for the year ended December 31, 2013 included in our 2013 Annual Report on Form 10-K filed with the U.S. Securities and Exchange Commission. Critical Accounting Policies, Estimates and Assumptions The preparation and presentation of financial statements in conformity with accounting principles generally accepted in the United States, or GAAP, requires us to establish policies and to make estimates and assumptions that affect the amounts reported in our consolidated financial statements. In our judgment, the accounting policies, estimates and assumptions described below have the greatest potential impact on our consolidated financial statements. Accounting assumptions and estimates are inherently uncertain and actual results may differ materially from our estimates. Revenue Recognition We recognize revenue from product sales when goods are shipped and title and risk of loss transfer to our customers. A substantial portion of our revenue is generated by the sale of specialty pharmaceutical products (primarily eye care pharmaceuticals and skin care and other products) to wholesalers within the United States, and we have a policy to attempt to maintain average U.S. wholesaler inventory levels at an amount less than eight weeks of our net sales. A portion of our revenue is generated from consigned inventory of breast implants maintained at physician, hospital and clinic locations. These customers are contractually obligated to maintain a specific level of inventory and to notify us upon the use of consigned inventory. Revenue for consigned inventory is recognized at the time we are notified by the customer that the product has been used. Notification is usually through the replenishing of the inventory, and we periodically review consignment inventories to confirm the accuracy of customer reporting. We generally offer cash discounts to customers for the early payment of receivables. Those discounts are recorded as a reduction of revenue and accounts receivable in the same period that the related sale is recorded. The amounts reserved for cash discounts were $7.5 million and $6.3 million at September 30, 2014 and December 31, 2013, respectively. Provisions for cash discounts deducted from consolidated sales in the third quarter of 2014 and 2013 were $22.4 million and $19.3 million, respectively. Provisions for cash discounts deducted from consolidated sales in the first nine months of 2014 and 2013 were $63.6 million and $55.6 million, respectively. We permit returns of product from most product lines by any class of customer if such product is returned in a timely manner, in good condition and from normal distribution channels. Return policies in certain international markets and for certain medical device products, primarily breast implants, provide for more stringent guidelines in accordance with the terms of contractual agreements with customers. Our estimates for sales returns are based upon the historical patterns of product returns matched against sales, and management's evaluation of specific factors that may increase the risk of product returns. The amount of allowances for sales returns recognized in our consolidated balance sheets at September 30, 2014 and December 31, 2013 were $85.9 million and $84.4 million, respectively, and are recorded in "Other accrued expenses" and "Trade receivables, net" in our consolidated balance sheets. Provisions for sales returns deducted from consolidated sales were $106.4 million and $113.8 million in the third quarter of 2014 and 2013, respectively. Provisions for sales returns deducted from consolidated sales were $334.4 million and $330.7 million in the first nine months of 2014 and 2013, respectively. The decrease in the provisions for sales returns in the third quarter of 2014 compared to the third quarter of 2013 is primarily due to a decrease in estimated product sales return rates for our eye care pharmaceuticals and breast aesthetics products, partially offset by increased overall product sales volume. The increase in the provisions for sales returns in the first nine months of 2014 compared to the first nine months of 2013 is primarily due to increased overall product sales volume, partially offset by a decrease in estimated product sales return rates for our breast aesthetics products. Actual historical allowances for cash discounts and product returns have been consistent with the amounts reserved or accrued. We participate in various U.S. federal and state government rebate programs, the largest of which are Medicaid, Medicare and the U.S. Department of Veterans Affairs. We also have contracts with various managed care and group purchasing organizations that provide for sales rebates and other contractual discounts. In the United States, we also incur chargebacks, which are reimbursements to wholesalers for honoring contracted prices to third parties. Outside of the United States, we incur sales allowances 30-------------------------------------------------------------------------------- Table of Contents based on contractual provisions and legislative mandates. We also offer rebate and other incentive programs directly to our customers for our aesthetic products and certain therapeutic products, including Botox® for both therapeutic and cosmetic uses, the Juvéderm® franchise, Latisse®, Natrelle®, Acuvail®, Aczone® and Restasis®, and for certain other skin care products. Sales rebates and incentive accruals reduce revenue in the same period that the related sale is recorded and are included in "Other accrued expenses" in our consolidated balance sheets. The amounts accrued for sales rebates and other incentive programs were $369.9 million and $279.3 million at September 30, 2014 and December 31, 2013, respectively. Provisions for sales rebates and other incentive programs deducted from consolidated sales were $372.6 million in the third quarter of 2014 compared to $292.2 million in the third quarter of 2013. The $80.4 million increase in the provisions for sales rebates and other incentive programs in the third quarter of 2014 is due to a $25.7 million increase in provisions for rebates associated with U.S. federal and state government programs, a $17.5 million increase in managed health care rebates and other contractual discounts, a $23.4 million increase in chargebacks, primarily due to increases in the list prices of certain eye care pharmaceuticals products that are subject to fixed contractual prices with government agencies, a $2.5 million increase in sales allowances outside of the United States and an $11.3 million increase in provisions for consumer coupons and other customer incentives. Provisions for sales rebates and other incentive programs deducted from consolidated sales were $1,090.0 million in the first nine months of 2014 compared to $831.1 million in the first nine months of 2013. The $258.9 million increase in the provisions for sales rebates and other incentive programs in the first nine months of 2014 is due to a $102.0 million increase in provisions for rebates associated with U.S. federal and state government programs, a $30.7 million increase in managed health care rebates and other contractual discounts, a $68.2 million increase in chargebacks, primarily due to increases in the list prices of certain eye care pharmaceuticals products that are subject to fixed contractual prices with government agencies, a $15.3 million increase in sales allowances outside of the United States and a $42.7 million increase in provisions for consumer coupons and other customer incentives. The increase in the provisions for sales rebates and other incentive programs in the three and nine month periods ended September 30, 2014 compared to the respective periods in 2013 is primarily due to increased eye care pharmaceutical sales in the United States and a shift in U.S. patient populations to government reimbursed programs, which typically have higher rebate percentages than other managed care programs. Rebates related to the Medicare Part D coverage gap in the United States increased in the three and nine month periods ended September 30, 2014 compared to the respective periods in 2013, primarily due to higher estimated utilization rates. In addition, an increase in our published list prices in the United States for pharmaceutical products, which occurred for several of our products in each of 2014 and 2013, generally results in higher provisions for sales rebates and other incentive programs deducted from consolidated sales. Our procedures for estimating amounts accrued for sales rebates and other incentive programs at the end of any period are based on available quantitative data and are supplemented by management's judgment with respect to many factors, including but not limited to, current market dynamics, changes in contract terms, changes in sales trends, an evaluation of current laws and regulations and product pricing. Quantitatively, we use historical sales, product utilization and rebate data and apply forecasting techniques in order to estimate our liability amounts. Qualitatively, management's judgment is applied to these items to modify, if appropriate, the estimated liability amounts. There are inherent risks in this process. For example, customers may not achieve assumed utilization levels; customers may misreport their utilization to us; actual utilization and reimbursement rates under government rebate programs may differ from those estimated; and actual movements of the U.S. Consumer Price Index for All Urban Consumers, or CPI-U, which affect our rebate programs with U.S. federal and state government agencies, may differ from those estimated. On a quarterly basis, adjustments to our estimated liabilities for sales rebates and other incentive programs related to sales made in prior periods have not been material and have generally been less than 0.5% of consolidated product net sales. An adjustment to our estimated liabilities of 0.5% of consolidated product net sales on a quarterly basis would result in an increase or decrease to net sales and earnings before income taxes of approximately $9.0 million to $10.0 million. The sensitivity of our estimates can vary by program and type of customer. Additionally, there is a significant time lag between the date we determine the estimated liability and when we actually pay the liability. Due to this time lag, we record adjustments to our estimated liabilities over several periods, which can result in a net increase to earnings or a net decrease to earnings in those periods. Material differences may result in the amount of revenue we recognize from product sales if the actual amount of rebates and incentives differ materially from the amounts estimated by management. We recognize license fees, royalties and reimbursement income for services provided as other revenues based on the facts and circumstances of each contractual agreement. In general, we recognize income upon the signing of a contractual agreement that grants rights to products or technology to a third party if we have no further obligation to provide products or services to the third party after entering into the contract. We recognize contingent consideration earned from the achievement of a substantive milestone in its entirety in the period in which the milestone is achieved. We defer income under contractual agreements when we have further obligations that indicate that a separate earnings process has not been completed. Contingent Consideration Contingent consideration liabilities represent future amounts we may be required to pay in conjunction with various business combinations. The ultimate amount of future payments is based on specified future criteria, such as sales performance and the 31-------------------------------------------------------------------------------- Table of Contents achievement of certain future development, regulatory and sales milestones and other contractual performance conditions. We estimate the fair value of the contingent consideration liabilities related to sales performance using the income approach, which involves forecasting estimated future net cash flows and discounting the net cash flows to their present value using a risk-adjusted rate of return. We estimate the fair value of the contingent consideration liabilities related to the achievement of future development and regulatory milestones by assigning an achievement probability to each potential milestone and discounting the associated cash payment to its present value using a risk-adjusted rate of return. We estimate the fair value of the contingent consideration liabilities associated with sales milestones by employing Monte Carlo simulations to estimate the volatility and systematic relative risk of revenues subject to sales milestone payments and discounting the associated cash payment amounts to their present values using a credit-risk-adjusted interest rate. The fair value of other contractual performance conditions is measured by assigning an achievement probability to each payment and discounting the payment to its present value using our estimated cost of borrowing. We evaluate our estimates of the fair value of contingent consideration liabilities on a periodic basis. Any changes in the fair value of contingent consideration liabilities are recorded through earnings as "Selling, general and administrative" in the accompanying unaudited condensed consolidated statements of earnings. The total estimated fair value of contingent consideration liabilities was $388.8 million and $225.2 million at September 30, 2014 and December 31, 2013, respectively, and was included in "Other accrued expenses" and "Other liabilities" in our consolidated balance sheets. Pensions We sponsor various pension plans in the United States and abroad in accordance with local laws and regulations. Our U.S. pension plans account for a large majority of our aggregate pension plans' net periodic benefit costs and projected benefit obligations. In connection with these plans, we use certain actuarial assumptions to determine the plans' net periodic benefit costs and projected benefit obligations, the most significant of which are the expected long-term rate of return on assets and the discount rate. Our assumption for the weighted average expected long-term rate of return on assets in our U.S. funded pension plan for determining the net periodic benefit cost is 6.25% for 2014 and 2013. Our assumptions for the weighted average expected long-term rate of return on assets in our non-U.S. funded pension plans are 4.56% and 4.36% for 2014 and 2013, respectively. For our U.S. funded pension plan, we determine, based upon recommendations from our pension plan's investment advisors, the expected rate of return using a building block approach that considers diversification and rebalancing for a long-term portfolio of invested assets. Our investment advisors study historical market returns and preserve long-term historical relationships between equities and fixed income in a manner consistent with the widely-accepted capital market principle that assets with higher volatility generate a greater return over the long run. They also evaluate market factors such as inflation and interest rates before long-term capital market assumptions are determined. For our non-U.S. funded pension plans, the expected rate of return was determined based on asset distribution and assumed long-term rates of return on fixed income instruments and equities. Market conditions and other factors can vary over time and could significantly affect our estimates of the weighted average expected long-term rate of return on plan assets. The expected rate of return is applied to the market-related value of plan assets. As a sensitivity measure, the effect of a 0.25% decline in our rate of return on assets assumptions for our U.S. and non-U.S. funded pension plans would increase our expected 2014 pre-tax pension benefit cost by approximately $2.3 million. The weighted average discount rates used to calculate our U.S. and non-U.S. pension benefit obligations at December 31, 2013 were 5.05% and 4.19%, respectively. The weighted average discount rates used to calculate our U.S. and non-U.S. net periodic benefit costs for 2014 were 5.05% and 4.19%, respectively, and for 2013, 4.23% and 4.55%, respectively. We determine the discount rate based upon a hypothetical portfolio of high quality fixed income investments with maturities that mirror the pension benefit obligations at the plans' measurement date. Market conditions and other factors can vary over time and could significantly affect our estimates for the discount rates used to calculate our pension benefit obligations and net periodic benefit costs for future years. As a sensitivity measure, the effect of a 0.25% decline in the discount rate assumption for our U.S. and non-U.S. pension plans would increase our expected 2014 pre-tax pension benefit costs by approximately $5.3 million and increase our pension plans' projected benefit obligations at December 31, 2013 by approximately $52.7 million. Share-Based Compensation We recognize compensation expense for all share-based awards made to employees and directors. The fair value of share-based awards is estimated at the grant date and the portion that is ultimately expected to vest is recognized as compensation cost over the requisite service period. The fair value of stock option awards that vest based on a service condition is estimated using the Black-Scholes option-pricing model. The fair value of share-based awards that contain a market condition is generally estimated using a Monte Carlo simulation model, and the fair value of modifications to share-based awards is generally estimated using a lattice model. The determination of fair value using the Black-Scholes, Monte Carlo simulation and lattice models is affected by our stock price as well as assumptions regarding a number of complex and subjective variables, including expected stock price volatility, 32-------------------------------------------------------------------------------- Table of Contents risk-free interest rate, expected dividends and projected employee stock option exercise behaviors. We currently estimate stock price volatility based upon an equal weighting of the historical average over the expected life of the award and the average implied volatility of at-the-money options traded in the open market. We estimate employee stock option exercise behavior based on actual historical exercise activity and assumptions regarding future exercise activity of unexercised, outstanding options. Share-based compensation expense is recognized only for those awards that are ultimately expected to vest, and we have applied an estimated forfeiture rate to unvested awards for the purpose of calculating compensation cost. These estimates will be revised in future periods if actual forfeitures differ from the estimates. Changes in forfeiture estimates impact compensation cost in the period in which the change in estimate occurs. Compensation expense for share-based awards based on a service condition is recognized using the straight-line single option method. On October 29, 2014, we granted special performance-based awards of restricted stock units, or Performance RSUs, to certain executive officers and key employees, excluding the Company's Chief Executive Officer, David E.I. Pyott. The purpose of this grant of Performance RSUs is to emphasize the Company's commitment to executing its strategic plan and further align the compensation of these executive officers and key employees with the delivery of sustained stockholder value. The Performance RSUs will cliff vest, if at all, upon the certification of achievement of both of the following performance targets, subject to the employee's continuous employment: (1) achievement of 2016 non-GAAP diluted earnings per share of $10.00, excluding the effect of any extraordinary share repurchase program and business combinations; and (2) achievement of a three-year (2014-2016) total stockholder return (stock price appreciation plus dividends), or TSR, that meets or exceeds the three-year median TSR during the same period for our compensation peer group. The Performance RSUs are subject to full acceleration of vesting upon each of the following events: (i) the employee's termination of employment due to death or disability prior to or on December 31, 2016; (ii) a change in control of the Company prior to the certification of achievement date in which the successor or surviving entity does not assume or replace the Performance RSUs, subject to the employee's continued employment through such date; or (iii) a "qualifying termination" (as defined in the award agreement) of the employee or the employee's termination of employment due to death or disability, in each case, following a change in control of the Company in which the successor or surviving entity assumes or replaces the Performance RSUs. The grant date fair value of the Performance RSUs was approximately $18 million, which will be recognized as expense over the performance period. Product Liability Self-Insurance We are largely self-insured for future product liability losses related to all of our products. We have historically been and continue to be self-insured for any product liability losses related to our breast implant products. Future product liability losses are, by their nature, uncertain and are based upon complex judgments and probabilities. The factors to consider in developing product liability reserves include the merits and jurisdiction of each claim, the nature and the number of other similar current and past claims, the nature of the product use and the likelihood of settlement. In addition, we accrue for certain potential product liability losses estimated to be incurred, but not reported, to the extent they can be reasonably estimated. We estimate these accruals for potential losses based primarily on historical claims experience and data regarding product usage. The total value of self-insured product liability claims settled in the third quarter and the first nine months of 2014 and 2013, respectively, and the value of known and reasonably estimable incurred but unreported self-insured product liability claims pending as of September 30, 2014 are not expected to have a material effect on our results of operations or liquidity. Income Taxes The provision for income taxes is determined using an estimated annual effective tax rate, which is generally less than the U.S. federal statutory rate, primarily because of lower tax rates in certain non-U.S. jurisdictions, research and development, or R&D, tax credits available in California and other foreign jurisdictions and deductions available in the United States for domestic production activities. We currently expect the U.S. R&D tax credit to be renewed in the fourth quarter of 2014, with retroactive effect to January 1, 2014; however, until appropriate legislation is enacted in the United States to renew the R&D tax credit, our estimated annual effective tax rate for fiscal year 2014 must exclude any potential benefit for this credit. Our effective tax rate may be subject to fluctuations during the year as new information is obtained, which may affect the assumptions used to estimate the annual effective tax rate, including factors such as the mix of pre-tax earnings in the various tax jurisdictions in which we operate, valuation allowances against deferred tax assets, the recognition or derecognition of tax benefits related to uncertain tax positions, expected utilization of R&D tax credits and acquired net operating losses and changes in or the interpretation of tax laws in jurisdictions where we conduct business. We recognize deferred tax assets and liabilities for temporary differences between the financial reporting basis and the tax basis of our assets and liabilities along with net operating loss and tax credit carryovers. We record a valuation allowance against our deferred tax assets to reduce the net carrying value to an amount that we believe is more likely than not to be realized. When we establish or reduce the valuation allowance against our deferred tax assets, our provision for income taxes will increase or decrease, respectively, in the period such determination is made. The valuation allowance against deferred tax assets was $48.9 million at September 30, 2014 and December 31, 2013. 33-------------------------------------------------------------------------------- Table of Contents We have not provided for withholding and U.S. taxes for the unremitted earnings of certain non-U.S. subsidiaries because we have currently reinvested these earnings indefinitely in these foreign operations. At December 31, 2013, we had approximately $3,828.0 million in unremitted earnings outside the United States for which withholding and U.S. taxes were not provided. Income tax expense would be incurred if these earnings were remitted to the United States. It is not practicable to estimate the amount of the deferred tax liability on such unremitted earnings. Upon remittance, certain foreign countries impose withholding taxes that are then available, subject to certain limitations, for use as credits against our U.S. tax liability, if any. We annually update our estimate of unremitted earnings outside the United States after the completion of each fiscal year. On October 14, 2014, Ireland's Minister for Finance announced changes to Ireland's corporate tax regime for multinational companies that, if enacted, will eliminate the future use of certain tax structures. We are currently assessing the impact of the proposed changes. Acquisitions The accounting for acquisitions requires extensive use of estimates and judgments to measure the fair value of the identifiable tangible and intangible assets acquired, including in-process research and development, and liabilities assumed. Additionally, we must determine whether an acquired entity is considered to be a business or a set of net assets, because the excess of the purchase price over the fair value of net assets acquired can only be recognized as goodwill in a business combination. On August 13, 2014, we acquired LiRIS Biomedical, Inc., or LiRIS, for $67.5 million in cash and estimated contingent consideration of $192.5 million as of the acquisition date. On March 1, 2013, we acquired MAP Pharmaceuticals, Inc., or MAP, for an aggregate purchase price of approximately $871.7 million, net of cash acquired. On April 12, 2013, we acquired Exemplar Pharma, LLC, or Exemplar, for an aggregate purchase price of approximately $16.1 million, net of cash acquired. We accounted for these acquisitions as business combinations. In March 2014, we completed the acquisition of certain assets related to technology under development for use as a dermal filler from Aline Aesthetics, LLC and Tautona Group, L.P. for an upfront payment of $10.0 million and potential future payments for certain milestone events. We accounted for this acquisition as a purchase of net assets. The tangible and intangible assets acquired and liabilities assumed in connection with these acquisitions were recognized based on their estimated fair values at the acquisition dates. The determination of estimated fair values requires significant estimates and assumptions including, but not limited to, determining the timing and estimated costs to complete the in-process projects, projecting regulatory approvals, estimating future cash flows and developing appropriate discount rates. We believe the estimated fair values assigned to the assets acquired and liabilities assumed are based on reasonable assumptions. Impairment Evaluations for Goodwill and Intangible Assets We evaluate goodwill for impairment on an annual basis, or more frequently if we believe indicators of impairment exist. We have identified two reporting units, specialty pharmaceuticals and medical devices, and perform our annual evaluation as of October 1 each year. For our specialty pharmaceuticals reporting unit, we performed a qualitative assessment to determine whether it is more likely than not that its fair value is less than its carrying amount. For our medical devices reporting unit, we evaluated goodwill for impairment by comparing its carrying value to its estimated fair value. We primarily use the income approach and the market approach that include the discounted cash flow method, the guideline company method, as well as other generally accepted valuation methodologies to determine the fair value. Upon completion of the October 2013 annual impairment assessment, we determined that no impairment was indicated. As of September 30, 2014, we are not aware of any significant indicators of impairment that exist for our goodwill that would require additional analysis. We also review intangible assets for impairment when events or changes in circumstances indicate that the carrying value of our intangible assets may not be recoverable. An impairment in the carrying value of an intangible asset is recognized whenever anticipated future undiscounted cash flows from an intangible asset are estimated to be less than its carrying value. As of September 30, 2014, we believe that the carrying values of our amortizable intangible assets are recoverable and the fair value exceeds the carrying value of our indefinite-lived in-process research and development intangible assets. Significant management judgment is required in the forecasts of future operating results that are used in our impairment evaluations. The estimates we have used are consistent with the plans and estimates that we use to manage our business. It is possible, however, that the plans may change and estimates used may prove to be inaccurate. If our actual results, or the plans and estimates used in future impairment analyses, are lower than the original estimates used to assess the recoverability of these assets, we could incur future impairment charges. 34-------------------------------------------------------------------------------- Table of Contents Continuing Operations Headquartered in Irvine, California, we are a multi-specialty health care company focused on developing and commercializing innovative pharmaceuticals, biologics, medical devices and over-the-counter products that enable people to live life to its full potential - to see more clearly, move more freely and express themselves more fully. We discover, develop and commercialize a diverse range of products for the ophthalmic, neurological, medical aesthetics, medical dermatology, breast aesthetics, urological and other specialty markets in more than 100 countries around the world. We are also a pioneer in specialty pharmaceutical, biologic and medical device research and development. Our research and development efforts are focused on products and technologies related to the many specialty areas in which we currently operate as well as new specialty areas where unmet medical needs are significant. We supplement our own research and development activities with our commitment to identify and obtain new technologies through in-licensing, research collaborations, joint ventures and acquisitions. At September 30, 2014, we employed approximately 11,500 persons around the world. Our principal geographic markets are the United States, Europe, Latin America and Asia Pacific. Results of Continuing Operations We operate our business on the basis of two reportable segments - specialty pharmaceuticals and medical devices. The specialty pharmaceuticals segment produces a broad range of pharmaceutical products, including: ophthalmic products for dry eye, glaucoma, inflammation, infection, allergy and retinal disease; Botox® for certain therapeutic and aesthetic indications; skin care products for acne, psoriasis, eyelash growth and other prescription and physician-dispensed skin care products; and urologics products. The medical devices segment produces a broad range of medical devices, including: breast implants for augmentation, revision and reconstructive surgery and tissue expanders; and facial aesthetics products. We provide global marketing strategy teams to coordinate the development and execution of a consistent marketing strategy for our products in all geographic regions that share similar distribution channels and customers. Management evaluates our business segments and various global product portfolios on a revenue basis, which is presented below in accordance with GAAP. We also report sales performance using the non-GAAP financial measure of constant currency sales. Constant currency sales represent current period reported sales, adjusted for the translation effect of changes in average foreign exchange rates between the current period and the corresponding period in the prior year. We calculate the currency effect by comparing adjusted current period reported sales, calculated using the monthly average foreign exchange rates for the corresponding period in the prior year, to the actual current period reported sales. We routinely evaluate our net sales performance at constant currency so that sales results can be viewed without the impact of changing foreign currency exchange rates, thereby facilitating period-to-period comparisons of our sales. Generally, when the U.S. dollar either strengthens or weakens against other currencies, the growth at constant currency rates will be higher or lower, respectively, than growth reported at actual exchange rates. The following table compares net sales by product line within each reportable segment and certain selected pharmaceutical products for the three and nine month periods ended September 30, 2014 and 2013: 35-------------------------------------------------------------------------------- Table of Contents Three Months Ended September 30, September 30, Change in Product Net Sales Percent Change inProduct Net Sales 2014 2013 Total Performance Currency Total Performance Currency (in millions) Net Sales by Product Line: Specialty Pharmaceuticals: Eye Care Pharmaceuticals $ 818.8 $ 717.1 $ 101.7 $ 103.0 $ (1.3 ) 14.2 % 14.4 % (0.2 )% Botox®/Neuromodulators 560.1 485.7 74.4 77.6 (3.2 ) 15.3 % 16.0 % (0.7 )% Skin Care and Other 141.1 127.0 14.1 14.2 (0.1 ) 11.1 % 11.2 % (0.1 )% Total Specialty Pharmaceuticals 1,520.0 1,329.8 190.2 194.8 (4.6 ) 14.3 % 14.6 % (0.3 )% Medical Devices: Breast Aesthetics 97.5 91.9 5.6 5.8 (0.2 ) 6.1 % 6.3 % (0.2 )% Facial Aesthetics 161.4 106.7 54.7 56.0 (1.3 ) 51.3 % 52.5 % (1.2 )% Core Medical Devices 258.9 198.6 60.3 61.8 (1.5 ) 30.4 % 31.1 % (0.7 )% Other (a) 11.8 - 11.8 11.8 - N/A N/A N/A Total Medical Devices 270.7 198.6 72.1 73.6 (1.5 ) 36.3 % 37.1 % (0.8 )% Total product net sales $ 1,790.7 $ 1,528.4 $ 262.3 $ 268.4 $ (6.1 ) 17.2 % 17.6 % (0.4 )% Domestic product net sales 63.9 % 62.5 % International product net sales 36.1 % 37.5 % Selected Product Net Sales (b): Alphagan® P, Alphagan® and Combigan® $ 130.2 $ 112.4 $ 17.8 $ 18.3 $ (0.5 ) 15.9 % 16.3 % (0.4 )% Lumigan® Franchise 165.6 153.5 12.1 11.7 0.4 7.9 % 7.6 % 0.3 % Total Glaucoma Products 297.6 267.9 29.7 29.7 - 11.1 % 11.1 % - % Restasis® 273.3 239.3 34.0 34.4 (0.4 ) 14.2 % 14.4 % (0.2 )% Latisse® 22.4 24.4 (2.0 ) (1.9 ) (0.1 ) (8.1 )% (7.7 )% (0.4 )% Total Specialty Pharmaceuticals and Core Medical Devices 1,778.9 1,528.4 250.5 256.6 (6.1 ) 16.4 % 16.8 % (0.4 )% 36-------------------------------------------------------------------------------- Table of Contents Nine Months Ended September 30, September 30, Change in Product Net Sales Percent Change inProduct Net Sales 2014 2013 Total Performance Currency Total Performance Currency (in millions) Net Sales by Product Line: Specialty Pharmaceuticals: Eye Care Pharmaceuticals $ 2,376.2 $ 2,108.1 $ 268.1 $ 283.3 $ (15.2 ) 12.7 % 13.4 % (0.7 )% Botox®/Neuromodulators 1,641.3 1,456.6 184.7 200.6 (15.9 ) 12.7 % 13.8 % (1.1 )% Skin Care and Other 387.9 344.6 43.3 43.9 (0.6 ) 12.6 % 12.7 % (0.1 )% Total Specialty Pharmaceuticals 4,405.4 3,909.3 496.1 527.8 (31.7 ) 12.7 % 13.5 % (0.8 )% Medical Devices: Breast Aesthetics 307.2 288.3 18.9 19.9 (1.0 ) 6.6 % 6.9 % (0.3 )% Facial Aesthetics 487.6 340.3 147.3 152.3 (5.0 ) 43.3 % 44.8 % (1.5 )% Core Medical Devices 794.8 628.6 166.2 172.2 (6.0 ) 26.4 % 27.4 % (1.0 )% Other (a) 36.9 - 36.9 36.9 - N/A N/A N/A Total Medical Devices 831.7 628.6 203.1 209.1 (6.0 ) 32.3 % 33.3 % (1.0 )% Total product net sales $ 5,237.1 $ 4,537.9 $ 699.2 $ 736.9 $ (37.7 ) 15.4 % 16.2 % (0.8 )% Domestic product net sales 62.7 % 61.5 % International product net sales 37.3 % 38.5 % Selected Product Net Sales (b): Alphagan® P, Alphagan® and Combigan® $ 376.9 $ 349.2 $ 27.7 $ 31.7 $ (4.0 ) 8.0 % 9.1 % (1.1 )% Lumigan® Franchise 485.3 452.7 32.6 30.0 2.6 7.2 % 6.6 % 0.6 % Total Glaucoma Products 868.6 808.7 59.9 61.3 (1.4 ) 7.4 % 7.6 % (0.2 )% Restasis® 774.3 662.4 111.9 116.2 (4.3 ) 16.9 % 17.5 % (0.6 )% Latisse® 71.2 76.6 (5.4 ) (4.9 ) (0.5 ) (7.1 )% (6.4 )% (0.7 )% Total Specialty Pharmaceuticals and Core Medical Devices 5,200.2 4,537.9 662.3 700.0 (37.7 ) 14.6 % 15.4 % (0.8 )% ----------(a) Other medical devices product net sales consist of sales made pursuant to transition services agreements with Apollo Endosurgery, Inc. related to the disposition of our obesity intervention business unit. (b) Percentage change in selected product net sales is calculated on amounts reported to the nearest whole dollar. Total glaucoma products include the Alphagan® and Lumigan® franchises. Product Net Sales Product net sales increased by $262.3 million in the third quarter of 2014 compared to the third quarter of 2013 due to an increase of $190.2 million in our specialty pharmaceuticals product net sales, an increase of $60.3 million in our core medical devices product net sales, and $11.8 million of sales made pursuant to transition services agreements with Apollo Endosurgery, Inc., or Apollo, related to the disposition of our obesity intervention business unit. The increase in specialty pharmaceuticals product net sales is due to increases in product net sales of our eye care pharmaceuticals, Botox®, and skin care and other product lines. The increase in core medical devices product net sales reflects an increase in product net sales of our facial aesthetics and breast aesthetics product lines. Several of our products, including Botox® Cosmetic, Latisse®, over-the-counter artificial tears, non-prescription aesthetics skin care products, facial aesthetics and breast implant products, as well as, in emerging markets, Botox® for therapeutic use and eye care products, are purchased based on consumer choice and have limited reimbursement or are not reimbursable by government or other health care plans and are, therefore, partially or wholly paid for directly by the consumer. As such, the general economic environment and level of consumer spending have a significant effect on our sales of these products. 37-------------------------------------------------------------------------------- Table of Contents In the United States, sales of our products that are reimbursable by government health care plans continue to be significantly impacted by the provisions of the Patient Protection and Affordable Care Act, as amended by the Health Care and Education Affordability Reconciliation Act, collectively, the PPACA, which extended Medicaid and Medicare benefits to new patient populations and increased Medicaid and Medicare rebates. Additionally, sales of our products in the United States that are reimbursed by managed care programs continue to be impacted by competitive pricing pressures. In Europe and some other international markets, sales of our products that are reimbursable by government health care plans continue to be impacted by mandatory price reductions, tenders and rebate increases. Certain of our products face generic competition and our products also compete with generic versions of some branded pharmaceutical products sold by our competitors. In October 2013, a generic version of Zymaxid®, our fluoroquinolone indicated for the treatment of bacterial conjunctivitis, was launched in the United States. In 2011, the U.S. patent for Tazorac®cream, indicated for psoriasis and acne, expired. The U.S. patents for Tazorac® gel expired in June 2014. The U.S. Food and Drug Administration, or FDA, has posted guidance regarding requirements for clinical bioequivalence for a generic of tazarotene cream, separately for both psoriasis and acne. We believe that this will require generic manufacturers to conduct a trial, at risk, for both indications. In June 2013, the FDA published a draft guidance on establishing bioequivalence to cyclosporine ophthalmic emulsion. Based on the methods proposed in the draft guidance, a generic company could seek FDA approval of an abbreviated new drug application, or ANDA, to compete with Restasis®. In August 2013, Allergan submitted a Comment to FDA regarding this draft guidance, and in January 2014, we submitted a Citizen Petition to FDA challenging, among other things, the scientific and legal validity of certain methods described in the draft guidance. In addition, we have obtained five additional U.S. patents covering the specific formulation and the method of using our Restasis® product, all of which expire in August 2024. There remains uncertainty as to any resolution of the issues raised in Allergan's Citizen Petition and Comment, including the scientific and legal validity of certain methods described in the draft guidance. There is also uncertainty as to the status of any ANDA filers with respect to Restasis®. If Allergan's Citizen Petition could have affected a pending ANDA, FDA's decision on the Petition would have been expected by July 28, 2014 (150 days after the Petition was filed). To date, however, Allergan has not received any response from FDA to its Citizen Petition. We do not currently believe that our aggregate product net sales will be materially impacted in 2014 by generic competition, but we could experience a rapid and significant decline in net sales of certain products if we are unable to successfully maintain or defend our patents and patent applications relating to such products. Eye care pharmaceuticals product net sales increased in the third quarter of 2014 compared to the third quarter of 2013 due to increases in the United States, Canada, Europe and Asia Pacific, partially offset by a decrease in sales in Latin America due primarily to the timing of shipments in Venezuela and a decrease in sales in Brazil and Argentina. The overall increase in total sales in dollars of our eye care pharmaceutical products in the third quarter of 2014 compared to the third quarter of 2013 is primarily due to an increase in sales of Restasis®, our therapeutic treatment for chronic dry eye disease, an increase in sales of Ozurdex®, our biodegradable, sustained-release steroid implant for the treatment of certain retinal diseases, an increase in sales of Ganfort™, our Lumigan® and timolol combination for the treatment of glaucoma, an increase in sales of our glaucoma products Lumigan® 0.03%, Combigan®, Alphagan® P 0.1% and Alphagan® P 0.15%, an increase in sales of eye care products, prednisolone acetate and fluorometholone, by our generics division, Pacific Pharma, Inc., an increase in our non-steroidal anti-inflammatory drug Acular LS®, and an increase of $9.1 million in sales of our artificial tears products, primarily consisting of Refresh® and Optive™ lubricant eye drops, partially offset by a decrease in sales of our fluoroquinolone products Zymaxid® and Zymar®, a decrease in sales of our older-generation anti-inflammatory drug Acular® and a small decline in our glaucoma drug Lumigan® 0.01%. We increased prices on certain eye care pharmaceutical products in the United States in the last six months of 2013 and the first nine months of 2014. Effective November 23, 2013, we increased the published U.S. list price for Acular LS® by ten percent. Effective January 1, 2014, we increased the published U.S. list price for Restasis®, Lastacaft®, Combigan®, Alphagan® P 0.1%, Alphagan® P 0.15%, Acular®, Acuvail® and Zymaxid® by seven percent and Lumigan® 0.01% by seven percent. Effective July 8, 2014, we increased the published U.S. list price for Alphagan® P 0.1%, Combigan®, Lumigan® 0.01% and Restasis® by an additional three percent. These price increases had a positive net effect on our U.S. sales in the third quarter of 2014 compared to the third quarter of 2013, but the actual net effect is difficult to determine due to the various managed care sales rebate and other incentive programs in which we participate. Wholesaler buying patterns and the change in dollar value of the prescription product mix also affected our reported net sales dollars, although we are unable to determine the impact of these effects. Total sales of Botox® increased in the third quarter of 2014 compared to the third quarter of 2013 due to growth in sales for both therapeutic and cosmetic uses. Sales of Botox® for therapeutic use increased in the United States, Canada, Europe, and Asia Pacific, primarily due to strong growth in sales for the prophylactic treatment of chronic migraine and for the treatment of urinary incontinence, partially offset by a decline in sales in Latin America. Sales of Botox® for cosmetic use increased in the United States and Europe, partially offset by a decline in sales in Canada and Latin America. The decline in net sales of Botox® for both therapeutic 38-------------------------------------------------------------------------------- Table of Contents and cosmetic use in Latin America was primarily due to decreases in sales in Venezuela related to the economic turmoil in that country and lack of foreign exchange. The increase in sales of Botox® for cosmetic use in the United States and Europe was primarily attributable to higher unit volume. Additionally, sales of Botox® for both therapeutic and cosmetic uses in the United States were positively impacted by an increase in the U.S. list price for Botox® of three percent that was effective January 1, 2014. We believe our worldwide market share for neuromodulators, including Botox®, was approximately 76% in the second quarter of 2014, the last quarter for which market data is available. Skin care and other product net sales increased in the third quarter of 2014 compared to the third quarter of 2013 primarily due to an increase of $12.1 million in sales of Aczone®, our topical dapsone treatment for acne vulgaris, an increase of $3.6 million in SkinMedica physician dispensed aesthetic skin care products, and an increase of $5.2 million in sales of our topical tazarotene products Tazorac® and Avage®, partially offset by a $2.0 million decrease in sales of Latisse®, our treatment for inadequate or insufficient eyelashes. The increase in sales of Aczone® is primarily attributable to an increase in product sales volume and an increase in the U.S. list price. The U.S. list prices for Aczone® and our topical tazarotene products Tazorac® and Avage® were increased by five percent effective January 1, 2014, and an additional five percent effective May 3, 2014. We have a policy to attempt to maintain average U.S. wholesaler inventory levels of our specialty pharmaceuticals products at an amount less than eight weeks of our net sales. At September 30, 2014, based on available external and internal information, we believe the amount of average U.S. wholesaler inventories of our specialty pharmaceutical products was at the low end of our stated policy levels. Breast aesthetics product net sales, which consist primarily of sales of silicone gel and saline breast implants and tissue expanders, increased in the third quarter of 2014 compared to the third quarter of 2013 due to increases in the United States, Canada, Latin America and Asia-Pacific. The increase in sales of breast aesthetics products in Canada, Latin America and Asia Pacific was primarily due to higher implant unit volume. The increase in sales of breast aesthetics products in the United States was primarily due to new product sales related to the recent launch of our Seri® Surgical Scaffold product, which is indicated for use as a transitory scaffold for soft tissue support and repair, and a beneficial change in implant product mix to higher priced round and shaped silicone gel products, partially offset by lower implant volume. Total sales of tissue expanders increased $0.7 million and total sales of silicone gel and saline breast implants, accessories and Seri® Surgical Scaffold products increased $4.9 million in the third quarter of 2014 compared to the third quarter of 2013. Facial aesthetics product net sales, which consist primarily of sales of hyaluronic acid-based dermal fillers used to correct facial wrinkles, increased in the third quarter of 2014 compared to the third quarter of 2013 due to strong growth in all of our principal geographic regions. The increase in sales of facial aesthetics products in the United States was due primarily to an overall increase in unit volume due to the recent launch of Juvéderm® Voluma™. The increase in sales of facial aesthetics products in international markets was due primarily to an overall increase in unit volume of Juvéderm® Voluma™, Juvéderm® Volift™ and Juvéderm® Volbella™. Foreign currency changes decreased product net sales by $6.1 million in the third quarter of 2014 compared to the third quarter of 2013, primarily due to the weakening of the euro, Canadian dollar, Argentine peso and Turkish lira compared to the U.S. dollar, partially offset by the strengthening of the U.K. pound compared to the U.S. dollar. U.S. product net sales as a percentage of total product net sales increased by 1.4 percentage points to 63.9% in the third quarter of 2014 compared to U.S. sales of 62.5% in the third quarter of 2013, due primarily to higher sales growth in the U.S. market compared to our international markets for our Botox®, eye care pharmaceuticals, and facial aesthetics product lines, partially offset by higher sales growth in international markets compared to the U.S. market for our breast aesthetics product line. Product net sales increased by $699.2 million in the first nine months of 2014 compared to the first nine months of 2013 due to an increase of $496.1 million in our specialty pharmaceuticals product net sales, an increase of $166.2 million in our core medical devices product net sales, and $36.9 million of sales made pursuant to transition services agreements with Apollo related to the disposition of our obesity intervention business unit. The increase in specialty pharmaceuticals product net sales in the first nine months of 2014 compared to the first nine months of 2013 was primarily due to the same factors discussed above with respect to the increase in specialty pharmaceuticals product net sales for the third quarter of 2014. In addition, net sales of Lumigan® 0.01% increased and net sales of Lastacaft® decreased in the first nine months of 2014 compared to the first nine months of 2013. The increase in eye care pharmaceuticals in the first nine months of 2014 compared to the first nine months of 2013 includes an increase of $26.1 million in sales of our artificial tears products. The increase in skin care and other product net sales in the first nine months of 2014 compared to the first nine months of 2013 is primarily due to an increase of $41.0 million in sales of Aczone®, an increase of $8.2 million in SkinMedica physician dispensed aesthetic skin care products and a net increase of $5.9 million in sales of Tazorac®, Zorac® and Avage®, partially offset by a $5.4 million decrease in sales of Latisse®. 39-------------------------------------------------------------------------------- Table of Contents The increase in medical devices product net sales in the first nine months of 2014 compared to the first nine months of 2013 was primarily due to the same factors discussed above with respect to the increase in medical devices product net sales for the third quarter of 2014. In addition, medical device product net sales in the first nine months of 2014 compared to the first nine months of 2013 were positively impacted by an increase in sales of breast aesthetics products in Europe, Africa and Middle East. Total sales of tissue expanders increased $2.9 million and total sales of silicone gel and saline breast implants, accessories and Seri® Surgical Scaffold products increased $16.0 million in the first nine months of 2014 compared to the first nine months of 2013. Foreign currency changes decreased product net sales by $37.7 million in the first nine months of 2014 compared to the first nine months of 2013, primarily due to the weakening of the Brazilian real, Canadian dollar, Australian dollar, Argentine peso and Turkish lira compared to the U.S. dollar, partially offset by the strengthening of the euro and the U.K. pound compared to the U.S. dollar. U.S. product net sales as a percentage of total product net sales increased by 1.2 percentage points to 62.7% in the first nine months of 2014 compared to U.S. sales of 61.5% in the first nine months of 2013, due primarily to higher sales growth in the U.S. market compared to our international markets for our Botox®, eye care pharmaceuticals, skin care and other, and facial aesthetics product lines, partially offset by higher sales growth in international markets compared to the U.S. market for our breast aesthetics product line. Other Revenues Other revenues decreased $3.9 million to $26.4 million in the third quarter of 2014 compared to $30.3 million in the third quarter of 2013. The decrease in other revenues is primarily due to a decrease in royalty income, primarily due to a decrease in the dollar value of sales of Lumigan® in Japan under a license agreement with Senju Pharmaceutical Co., Ltd., or Senju, and a decrease in royalty income from sales of brimonidine products in the United States under a license agreement with Alcon, Inc. The decrease in royalty income from sales of Lumigan® in Japan is primarily due to the negative translation effect of average foreign currency rates in effect for the Japanese yen during the third quarter of 2014 compared to the third quarter of 2013. Other revenues increased $12.2 million to $90.3 million in first nine months of 2014 compared to $78.1 million in the first nine months of 2013. The increase in other revenues is primarily due to the achievement of a sales milestone related to sales of Lumigan® in Japan and an increase in royalty income from sales of Aiphagan® in Japan under a license agreement with Senju and sales of brimonidine products in the United States, partially offset by a decrease in royalty income from sales of Lumigan® in Japan. The decrease in royalty income from sales of Lumigan® in Japan is primarily due to the negative translation effect of average foreign currency rates in effect for the Japanese yen during the first nine months of 2014 compared to the first nine months of 2013. Cost of Sales Cost of sales increased $14.4 million, or 7.5%, in the third quarter of 2014 to $206.6 million, or 11.5% of product net sales, compared to $192.2 million, or 12.6% of product net sales in the third quarter of 2013. This increase in cost of sales primarily resulted from the 17.2% increase in total product net sales, partially offset by a decrease in cost of sales as a percentage of product net sales primarily due to beneficial changes in standard costs, product and geographic mix, and lower royalty expenses. Cost of sales increased $42.1 million, or 7.1%, in the first nine months of 2014 to $633.3 million, or 12.1% of product net sales, compared to $591.2 million, or 13.0% of product net sales in the first nine months of 2013. Cost of sales in the first nine months of 2013 includes $8.9 million for the purchase accounting fair market value inventory adjustment rollout related to our acquisition of SkinMedica. Excluding the effect of this charge, cost of sales increased $51.0 million, or 8.8% in the first nine months of 2014 compared to the first nine months of 2013. This increase in cost of sales primarily resulted from the 15.4% increase in total product net sales, partially offset by a decrease in cost of sales as a percentage of product net sales primarily due to beneficial changes in product and geographic mix and lower royalty expenses. Selling, General and Administrative Selling, general and administrative, or SG&A, expenses increased $125.4 million, or 21.3%, to $714.7 million, or 39.9% of product net sales, in the third quarter of 2014 compared to $589.3 million, or 38.6% of product net sales, in the third quarter of 2013. SG&A expenses in the third quarter of 2014 include $30.3 million of expenses associated with the Allergan Board of Directors' consideration of unsolicited proposals from Valeant Pharmaceuticals International, Inc., or Valeant, to acquire all of the outstanding shares of Allergan, consisting primarily of investment banking fees, legal fees, specialty accounting services and public relations, a $37.3 million charge for estimated bad debts in Venezuela due to changes in that country's foreign currency exchange system and administration by their National Center for Foreign Commerce, or CENCOEX, a Venezuela government body, which is severely limiting U.S. dollar payments for older receivables due from local customers, a $32.2 million estimated 40-------------------------------------------------------------------------------- Table of Contents expense catch-up adjustment in accordance with final regulations issued by the U.S. Internal Revenue Service, or IRS, governing administration of the annual fee on branded prescription drug manufacturers and importers, $14.5 million of expenses related to the global restructuring announced in July 2014, $1.2 million of transaction and integration costs related to business combinations and license agreements, expenses of $0.5 million related to the January 2014 realignment of various business functions and $18.9 million of income related to the change in fair value of contingent consideration liabilities associated with certain business combinations. SG&A expenses in the third quarter of 2013 include $3.4 million of transaction and integration costs related to business combinations and license agreements, a $1.5 million charge related to the change in fair value of contingent consideration liabilities associated with certain business combinations, expenses of $1.4 million related to the realignment of various business functions and expenses of $0.1 million for external costs of stockholder derivative litigation associated with the 2010 global settlement with the U.S. Department of Justice, or DOJ, regarding our past U.S. sales and marketing practices relating to certain therapeutic uses of Botox®. Excluding the effect of the items described above, SG&A expenses increased $34.7 million, or 6.0%, to $617.6 million, or 34.5% of product net sales, in the third quarter of 2014 compared to $582.9 million, or 38.1% of product net sales in the third quarter of 2013. The increase in SG&A expenses in dollars, excluding the charges described above, primarily relates to increases in promotion, selling, and general and administrative expenses. The increase in promotion expenses is primarily due to an increase in direct-to-consumer advertising in the United States for Botox® for the treatment of urinary incontinence, Juvéderm® Voluma™, which was recently launched in the United States, and Botox® Cosmetic, partially offset by a decline in direct-to-consumer advertising for Aczone®. The increase in selling expenses in the third quarter of 2014 compared to the third quarter of 2013 principally relates to increased personnel and related incentive compensation costs that support the 17.2% increase in product net sales, including sales force expansions in Europe, Africa and Middle East and Asia. General and administrative expenses increased in the third quarter of 2014 compared to the third quarter of 2013 primarily due to an increase in the estimated expense for our share of the annual non-deductible fee on entities that sell branded prescription drugs to specified U.S. government programs, additional costs associated with the transition services agreements with Apollo and higher personnel and related incentive compensation costs, partially offset by a decrease in legal expenses. SG&A expenses increased $288.2 million, or 16.0%, to $2,092.2 million, or 39.9% of product net sales, in the first nine months of 2014 compared to $1,804.0 million, or 39.8% of product net sales, in the first nine months of 2013. SG&A expenses in the first nine months of 2014 include $60.5 million of expenses associated with the Allergan Board of Directors' consideration of unsolicited proposals from Valeant to acquire all of the outstanding shares of Allergan, a $37.3 million charge for estimated bad debts in Venezuela due to changes in that country's foreign currency exchange system and administration by CENCOEX, which is severely limiting U.S. dollar payments for older receivables due from local customers, a $32.2 million estimated expense catch-up adjustment in accordance with final regulations issued by the IRS governing administration of the annual fee on branded prescription drug manufacturers and importers, $14.5 million of expenses related to the global restructuring announced in July 2014, $2.2 million of transaction and integration costs related to business combinations and license agreements, expenses of $5.8 million related to the January 2014 realignment of various business functions and $15.5 million of income related to the change in fair value of contingent consideration liabilities associated with certain business combinations. SG&A expenses in the first nine months of 2013 include $18.5 million of transaction and integration costs related to business combinations and license agreements, a $4.8 million charge related to the change in fair value of contingent consideration liabilities associated with certain business combinations, expenses of $1.6 million related to the realignment of various business functions and expenses of $3.6 million for external costs of stockholder derivative litigation associated with the 2010 global settlement with the DOJ discussed above and other legal contingency expenses. Excluding the effect of the items described above, SG&A expenses increased $179.7 million, or 10.1%, to $1,955.2 million, or 37.3% of product net sales, in the first nine months of 2014 compared to $1,775.5 million, or 39.1% of product net sales in the first nine months of 2013. The increase in SG&A expenses in dollars, excluding the charges described above, primarily relates to increases in promotion, selling, marketing and general and administrative expenses. The increase in promotion expenses in the first nine months of 2014 is primarily due to the same factors discussed with regard to the increase in promotion expenses in the third quarter of 2014. Additionally, expenses for direct-to-consumer advertising in the United States for Botox® for the treatment of chronic migraine and Aczone® increased in the first nine months of 2014 compared to the first nine months of 2013. The increase in selling expenses in the first nine months of 2014 compared to the first nine months of 2013 principally relates to increased personnel and related incentive compensation costs that support the 15.4% increase in product net sales, including sales force expansions in Europe, Africa and Middle East and Asia. The increase in marketing expenses in the first nine months of 2014 is primarily due to product launch support costs in the United States related to Juvéderm® Voluma™ and Seri® Surgical Scaffold products. General and administrative expenses increased in the first nine months of 2014 compared to the first nine months of 2013 primarily due to higher personnel and related incentive compensation costs, an increase in the estimated expense for our share of the annual non-deductible fee on entities that sell branded prescription drugs to specified U.S. government programs and an increase in information services costs, partially offset by a decrease in legal expenses. Under the provisions of the PPACA, companies that sell branded prescription drugs or biologics to specified government programs in the United States are subject to an annual non-deductible fee based on the company's relative market share of branded prescription drugs or biologics sold to the specified government programs. The non-deductible fee is recorded in SG&A expenses, and the related full year 2014 expense is expected to be approximately $30 million to $35 million, exclusive of the $32.2 million 41-------------------------------------------------------------------------------- Table of Contents estimated catch-up adjustment recorded in the third quarter of 2014 related to the issuance of final IRS regulations described above. Also under the provisions of the PPACA, the Company is required to pay a tax deductible excise tax of 2.3% on the sale of certain medical devices in the United States. The excise tax is recorded in SG&A expenses, and the related full year 2014 expense is expected to be approximately $11 million to $13 million. Research and Development We believe that our future medium- and long-term revenue and cash flows are most likely to be affected by the successful development and approval of our significant late-stage research and development candidates. As of September 30, 2014, we have the following significant R&D projects in late-stage development: • SempranaTM - formerly referred to as Levadex®(U.S. - Filed/Allergan addressing FDA Complete Response Letter) for migraine• Restasis® (Europe - Phase III) for ocular surface disease • Ser-120 (U.S. - Phase III) for nocturia (in collaboration with Serenity) • Abicipar pegol - Anti-VEGF DARPin® (U.S. - advancing to Phase III) for neovascular age-related macular degeneration • Bimatoprost sustained-release implant (U.S. - Phase III) for glaucoma • Botox® (U.S. - Phase III) for juvenile cerebral palsy • Aczone® X (U.S. - Phase III) for acne vulgaris • AGN-199201 (U.S. - Phase III) for rosacea • Latisse® (U.S. - Phase III) for brow On September 2, 2014, we announced that the European Commission has extended the Marketing Authorization for Ozurdex® to treat adult patients with vision loss due to diabetic macular edema, or DME, who are pseudophakic (have an artificial lens implant), or who are considered insufficiently responsive to, or unsuitable for non-corticosteroid therapy. DME is a common complication with diabetes and is the leading cause of sight loss in patients with diabetes. On September 29, 2014, we announced that the FDA removed the limitations on the indication for Ozurdex® for the treatment of DME. Ozurdex® was originally approved in June as a treatment for DME in patients who are pseudophakic (have an artificial lens implant following cataract surgery) or who are phakic (have their natural lens) and are scheduled for cataract surgery. In addition to the significant R&D projects in late stage development described above, we have certain important Phase II projects including bimatoprost for scalp hair growth, Botox® for depression and Botox® for osteoarthritis pain. For management purposes, we accumulate direct costs for R&D projects, but do not allocate all indirect project costs, such as R&D administration, infrastructure and regulatory affairs costs, to specific R&D projects. Additionally, R&D expense includes upfront payments to license or purchase in-process R&D assets that have not achieved regulatory approval. Our overall R&D expenses are not materially concentrated in any specific project or stage of development. The following table sets forth direct costs for our late-stage projects (which include candidates in Phase III clinical trials) and other R&D projects, upfront and milestone payments related to licenses or purchases of in-process R&D assets and all other R&D expenses for the three and nine month periods ended September 30, 2014 and 2013: Three Months Ended Nine Months Ended September 30, September 30, September 30, 2014 2013 September 30, 2014 2013 (in millions) Direct costs for: Late-stage projects $ 108.8 $ 59.3 $ 302.1 $ 173.5 Other R&D projects 128.0 164.8 430.5 509.8 Upfront and milestone payments related to licenses or purchases of in-process R&D assets 15.0 6.5 90.0 6.5 Other R&D expenses 36.7 27.0 103.6 83.1 Total $ 288.5 $ 257.6 $ 926.2 $ 772.9 R&D expenses increased $30.9 million, or 12.0%, to $288.5 million in the third quarter of 2014, or 16.1% of product net sales, compared to $257.6 million, or 16.9% of product net sales in the third quarter of 2013. R&D expenses in the third quarter of 2014 include a $15.0 million development milestone payment associated with certain neurotoxin product candidates in-licensed from Medytox, Inc., $6.1 million of R&D expenses related to the global restructuring announced in July 2014 and $0.2 million 42-------------------------------------------------------------------------------- Table of Contents of R&D expenses related to the January 2014 realignment of various business functions. R&D expenses in the third quarter of 2013 include $6.5 million for an upfront payment associated with the in-licensing of a technology for the treatment of ocular disease that has not yet achieved regulatory approval. Excluding the effect of these charges, R&D expenses increased $16.1 million, or 6.4%, to $267.2 million in the third quarter of 2014, or 14.9% of product net sales.The increase in R&D expenses in dollars was primarily due to increased spending on next generation eye care pharmaceuticals products for the treatment of glaucoma and retinal diseases, including the DARPin® development programs, an increase in spending on the next generation of our Aczone® product for the treatment of acne, increased spending on Botox® for the treatment of movement disorders, including juvenile cerebral palsy, increased spending on Botox® for the treatment of depression, and an increase in spending on development of dermal filler products using our proprietary Vycross™ technology, partially offset by a decrease in spending on our recently launched Seri® Surgical Scaffold product, a decrease in expenses for potential new treatment applications for Latisse®, a decrease in expenses for Ozurdex®, and a decrease in expenses for new technology discovery programs. R&D expenses increased $153.3 million, or 19.8%, to $926.2 million in the first nine months of 2014, or 17.7% of product net sales, compared to $772.9 million, or 17.0% of product net sales in the first nine months of 2013. R&D expenses in the first nine months of 2014 include a $65.0 million charge for an upfront payment and an additional development milestone payment of $15.0 million associated with the in-licensing of certain neurotoxin product candidates currently in development from Medytox, Inc., that have not yet achieved regulatory approval, a $10.0 million charge for the purchase of certain dermal filler technology under development that has not yet achieved regulatory approval, $6.1 million of R&D expenses related to the global restructuring announced in July 2014 and $2.6 million of R&D expenses related to the January 2014 realignment of various business functions. R&D expenses in the first nine months of 2013 include $6.5 million for an upfront payment associated with the in-licensing of a technology for the treatment of ocular disease that has not yet achieved regulatory approval. Excluding the effect of the charges described above, R&D expenses increased $61.1 million, or 8.0%, to $827.5 million in the first nine months of 2014, or 15.8% of product net sales. The increase in R&D expenses in dollars, excluding these charges, was primarily due to the same factors described above related to the increase in R&D expenses in the third quarter of 2014. Additionally, expenses associated with our collaboration with Serenity Pharmaceuticals, LLC, or Serenity, related to Ser-120 for the treatment of nocturia, increased in the first nine months of 2014 compared to the first nine months of 2013. Amortization of Intangible Assets Amortization of intangible assets increased $0.2 million to $29.0 million in the third quarter of 2014, or 1.6% of product net sales, compared to $28.8 million, or 1.9% of product net sales, in the third quarter of 2013. Amortization of intangible assets decreased $3.7 million to $84.8 million in the first nine months of 2014, or 1.6% of product net sales, compared to $88.5 million, or 2.0% of product net sales, in the first nine months of 2013. The decrease in amortization expense is primarily due to a decline in amortization expense associated with certain licensing assets that became fully amortized at the end of the first quarter of 2013 and the impairment of an intangible asset for distribution rights acquired in connection with our 2011 acquisition of Precision Light, Inc. in the fourth quarter of 2013, partially offset by an increase in the balance of intangible assets subject to amortization, including intangible assets that we acquired in connection with our March 2013 acquisition of MAP and August 2014 acquisition of LiRIS. Restructuring Charges and Integration Costs July 2014 Restructuring Plan In July 2014, we completed a global review of our structures and processes, portfolio of research and development projects and marketed products, and our geographies in an effort to prioritize the highest value investments. As a result of this review, we initiated a restructuring of our global operations to improve efficiency and productivity. We currently estimate that we will incur total non-recurring pre-tax charges of between $350.0 million and $400.0 million in connection with the restructuring and other costs, of which $60.0 million to $70.0 million will be a non-cash charge associated with the acceleration of previously unrecognized share-based compensation costs and certain other non-cash accounting adjustments. As part of the restructuring, we will reduce our workforce by approximately 1,500 employees, or approximately 13 percent of our current global headcount, and eliminate an additional approximately 250 vacant positions. We began to record costs associated with the July 2014 restructuring plan in the third quarter of 2014 and expect to continue to recognize costs through the second quarter of 2015. The restructuring charges primarily consist of employee severance and other one-time termination benefits, facility lease and other contract termination costs and other costs, primarily consisting of relocation costs and consulting fees, associated with the restructuring plan. In the third quarter of 2014, we recorded restructuring charges of $184.6 million and recognized $9.7 million related to accelerated share-based compensation, consisting of $0.1 million of cost of sales, $7.2 million in SG&A expenses and $2.4 million in R&D expenses, and $10.9 million of asset write-offs and accelerated depreciation costs, consisting of $0.1 million of cost of sales, $7.2 million in SG&A expenses and $3.6 million in 43-------------------------------------------------------------------------------- Table of Contents R&D expenses. In addition, in the third quarter of 2014 we also recognized duplicated operating expenses and other costs of $0.1 million of cost of sales, $0.1 million in SG&A expenses and $0.1 million in R&D expenses. The following table presents the restructuring charges related to the July 2014 restructuring plan during the nine month period ended September 30, 2014: Employee Contract Termination Severance Costs Other Total (in millions) Restructuring charges during the nine month period ended September 30, 2014 $ 150.3 $ 17.1 $ 17.2 $ 184.6 Spending (10.5 ) (0.1 ) (4.9 ) (15.5 ) Balance at September 30, 2014 (included in "Accounts payable," "Other accrued expenses" and "Other liabilities") $ 139.8 $ 17.0 $ 12.3 $ 169.1 January 2014 Restructuring Plan In January 2014, we initiated a restructuring plan that includes certain sales force realignments and position eliminations, certain facility relocations and closures in the United States and Europe and the realignment of certain other business support functions, which affected approximately 250 employees. We currently estimate that the total costs related to this restructuring plan will be between $40 million and $45 million, which include severance and other one-time termination benefits, lease exit and contract termination costs, accelerated depreciation and share-based compensation expenses, and relocation and duplicate operating expenses. We began to record costs associated with the January 2014 restructuring plan in the first quarter of 2014 and expect that the majority of the expenses will be incurred in 2014 with the exception of certain expenses related to the relocation of a minor manufacturing facility to be incurred in 2015. The restructuring charges primarily consist of employee severance, one-time termination benefits and contract termination costs associated with the restructuring plan. In the first quarter of 2014, we recorded restructuring charges of $24.0 million and recognized additional costs of $6.5 million related to accelerated depreciation and share-based compensation expenses and duplicate operating expenses, consisting of $0.8 million of cost of sales, $4.3 million in SG&A expenses and $1.4 million in R&D expenses. In the second quarter of 2014, we recorded a $2.3 million restructuring charge reversal and recognized additional costs of $2.3 million related to accelerated depreciation and share-based compensation expenses and duplicate operating expenses, consisting of $0.9 million of cost of sales, $0.9 million in SG&A expenses and $0.5 million in R&D expenses. In the third quarter of 2014, we recorded restructuring charges of $0.9 million and recognized additional costs of $1.5 million related to accelerated depreciation and share-based compensation expenses and duplicate operating expenses, consisting of $0.8 million of cost of sales, $0.5 million in SG&A expenses and $0.2 million in R&D expenses. The following table presents the restructuring charges related to the 2014 restructuring plan during the nine month period ended September 30, 2014: Employee Severance Other Total (in millions)Restructuring charges during the nine month period ended September 30, 2014 $ 20.3 $ 2.3 $ 22.6 Spending (13.9 ) (1.5 ) (15.4 ) Balance at September 30, 2014 (included in "Other accrued expenses") $ 6.4 $ 0.8 $ 7.2 Other Restructuring Activities and Integration Costs In connection with our March 2013 acquisition of MAP, our April 2013 acquisition of Exemplar and our December 2012 acquisition of SkinMedica, Inc., we initiated restructuring activities in 2013 to integrate the operations of the acquired businesses with our operations and to capture synergies through the centralization of certain research and development, manufacturing, general and administrative and commercial functions. For the year ended December 31, 2013, we recorded $4.5 million of restructuring charges, including $4.3 million in the first quarter of 2013, a $0.9 million restructuring charge reversal in the second quarter of 2013 and an additional $0.6 million of restructuring charges in the third quarter of 2013, primarily consisting of employee severance and other one-time termination benefits for approximately 111 people. In the first quarter of 2014, we recorded an additional $0.4 million of restructuring charges. Included in the nine month period ended September 30, 2014 are $0.7 million of restructuring charges for lease terminations and employee severance and other one-time termination benefits, $0.1 million of SG&A expenses and $0.5 million of R&D 44-------------------------------------------------------------------------------- Table of Contents expenses related to the realignment of various business functions initiated in prior years. Included in the three month period ended September 30, 2013 are $1.4 million of SG&A expenses and $0.2 million of R&D expenses, and in the nine month period ended September 30, 2013 are $0.9 million of restructuring charges for employee severance and other one-time termination benefits, $1.6 million of SG&A expenses and $0.9 million of R&D expenses related to the realignment of various business functions initiated in prior years. Included in the three month period ended September 30, 2014 are $1.2 million of SG&A expenses and in the nine month period ended September 30, 2014 are $2.2 million of SG&A expenses and $0.4 million of R&D expenses related to transaction and integration costs associated with the purchase of various businesses and collaboration agreements. Included in the three month period ended September 30, 2013 are $3.4 million of SG&A expenses and in the nine month period ended September 30, 2013 are $0.1 million of cost of sales and $18.5 million of SG&A expenses related to transaction and integration costs associated with the purchase of various businesses and collaboration agreements. The SG&A expenses for the nine month period ended September 30, 2013 primarily consist of investment banking and legal fees. Operating Income Management evaluates business segment performance on an operating income basis exclusive of general and administrative expenses and other indirect costs, legal settlement expenses, impairment of intangible assets and related costs, restructuring charges, in-process research and development expenses, amortization of certain identifiable intangible assets related to business combinations and asset acquisitions and related capitalized licensing costs and certain other adjustments, which are not allocated to our business segments for performance assessment by our chief operating decision maker. Other adjustments excluded from our business segments for purposes of performance assessment represent income or expenses that do not reflect, according to established Company-defined criteria, operating income or expenses associated with our core business activities. For the third quarter of 2014, general and administrative expenses, other indirect costs and other adjustments not allocated to our business segments for purposes of performance assessment consisted of general and administrative expenses of $114.4 million, expenses of $20.9 million related to the global restructuring announced in July 2014, costs of $30.3 million associated with the Allergan Board of Directors' consideration of unsolicited proposals from Valeant to acquire all of the outstanding shares of Allergan, estimated bad debt expense of $37.3 million due to changes in Venezuela's foreign exchange system and administration by CENCOEX, an estimated expense catch-up adjustment of $32.2 million in accordance with final regulations issued by the IRS governing administration of the annual fee on branded prescription drug manufacturers and importers, a development milestone payment of $15.0 million for technology that has not achieved regulatory approval, income of $18.9 million for changes in the fair value of contingent consideration liabilities, integration and transaction costs of $1.2 million associated with the purchase of various businesses, expenses of $1.5 million related to the realignment of various business functions and other net indirect costs of $6.9 million. For the third quarter of 2013, general and administrative expenses, other indirect costs and other adjustments not allocated to our business segments for purposes of performance assessment consisted of general and administrative expenses of $114.3 million, stockholder derivative litigation costs of $0.1 million in connection with the 2010 global settlement with the DOJ regarding our past U.S. sales and marketing practices relating to Botox®, charges of $1.5 million for changes in the fair value of contingent consideration liabilities, integration and transaction costs of $3.0 million associated with the purchase of various businesses, expenses of $1.6 million related to the realignment of various business functions, an upfront licensing fee of $6.5 million for technology that has not achieved regulatory approval and related transaction costs of $0.1 million, transaction costs of $0.3 million associated with a licensing agreement with Medytox, Inc. and other net indirect costs of $6.0 million. For the first nine months of 2014, general and administrative expenses, other indirect costs and other adjustments not allocated to our business segments for purposes of performance assessment consisted of sales milestone revenue of $9.7 million associated with a license agreement with Senju, general and administrative expenses of $353.4 million, expenses of $20.9 million related to the global restructuring announced in July 2014, costs of $60.5 million associated with the Allergan Board of Directors' consideration of unsolicited proposals from Valeant to acquire all of the outstanding shares of Allergan, estimated bad debt expense of $37.3 million due to changes in Venezuela's foreign exchange system and administration by CENCOEX, an estimated expense catch-up adjustment of $32.2 million in accordance with final regulations issued by the IRS governing administration of the annual fee on branded prescription drug manufacturers and importers, an upfront licensing fee of $65.0 million and a subsequent development milestone payment of $15.0 million for technology that has not achieved regulatory approval and related transaction costs of $0.4 million, a $10.0 million expense for acquired in-process research and development technology and related transaction costs of $0.6 million, income of $15.5 million for changes in the fair value of contingent consideration liabilities, integration and transaction costs of $1.6 million associated with the purchase of various businesses, expenses of $10.9 million related to the realignment of various business functions and other net indirect costs of $24.5 million. 45-------------------------------------------------------------------------------- Table of Contents For the first nine months of 2013, general and administrative expenses, other indirect costs and other adjustments not allocated to our business segments for purposes of performance assessment consisted of general and administrative expenses of $335.4 million, aggregate charges of $3.6 million for stockholder derivative litigation costs in connection with the 2010 global settlement with the DOJ regarding our past U.S. sales and marketing practices relating to Botox® and other legal contingency expenses, charges of $4.8 million for changes in the fair value of contingent consideration liabilities, a purchase accounting fair market value inventory adjustment of $8.9 million associated with the acquisition of SkinMedica, Inc., integration and transaction costs of $18.2 million associated with the purchase of various businesses, expenses of $2.5 million related to the realignment of various business functions, an upfront licensing fee of $6.5 million for technology that has not achieved regulatory approval and related transaction costs of $0.1 million, transaction costs of $0.3 million associated with a licensing agreement with Medytox, Inc. and other net indirect costs of $20.9 million. The following table presents operating income for each reportable segment for the three and nine month periods ended September 30, 2014 and 2013 and a reconciliation of our segments' operating income to consolidated operating income: Three Months Ended Nine Months Ended September 30, September 30, September 30, September 30, 2014 2013 2014 2013 (in millions) Operating income: Specialty pharmaceuticals $ 750.1 $ 593.4 $ 2,006.1 $ 1,652.8 Medical devices 96.4 58.5 272.3 188.2 Total segments 846.5 651.9 2,278.4 1,841.0 General and administrative expenses, other indirect costs and other adjustments 240.8 133.4 607.1 401.2 Amortization of intangible assets (a) 27.4 27.7 80.4 80.4 Restructuring charges 185.5 0.6 208.3 4.9 Total operating income $ 392.8 $ 490.2 $ 1,382.6 $ 1,354.5 ----------(a) Represents amortization of certain identifiable intangible assets related to business combinations and asset acquisitions and related capitalized licensing costs, as applicable. Our consolidated operating income in the third quarter of 2014 was $392.8 million, or 21.9% of product net sales, compared to consolidated operating income of $490.2 million, or 32.1% of product net sales in the third quarter of 2013. The $97.4 million decrease in consolidated operating income was due to a $3.9 million decrease in other revenues, a $14.4 million increase in cost of sales, a $125.4 million increase in SG&A expenses, a $30.9 million increase in R&D expenses, a $0.2 million increase in amortization of intangible assets and a $184.9 million increase in restructuring charges, partially offset by a $262.3 million increase in product net sales. Our specialty pharmaceuticals segment operating income in the third quarter of 2014 was $750.1 million, compared to operating income of $593.4 million in the third quarter of 2013. The $156.7 million increase in our specialty pharmaceuticals segment operating income was due primarily to an increase in product net sales across all product lines, partially offset by an increase in R&D expenses. Our medical devices segment operating income in the third quarter of 2014 was $96.4 million, compared to operating income of $58.5 million in the third quarter of 2013. The $37.9 million increase in our medical devices segment operating income was due primarily to an increase in product net sales of our facial aesthetics and breast aesthetics product lines and a decrease in R&D expenses, partially offset by an increase in selling, promotion and marketing expenses. Our consolidated operating income in the first nine months of 2014 was $1,382.6 million, or 26.4% of product net sales, compared to consolidated operating income of $1,354.5 million, or 29.8% of product net sales in the first nine months of 2013. The $28.1 million increase in consolidated operating income was due to a $699.2 million increase in product net sales, a $12.2 million increase in other revenues and a $3.7 million decrease in amortization of intangible assets, partially offset by a $42.1 million increase in cost of sales, a $288.2 million increase in SG&A expenses, a $153.3 million increase in R&D expenses and a $203.4 million increase in restructuring charges. Our specialty pharmaceuticals segment operating income in the first nine months of 2014 was $2,006.1 million, compared to operating income of $1,652.8 million in the first nine months of 2013. The $353.3 million increase in our specialty 46-------------------------------------------------------------------------------- Table of Contents pharmaceuticals segment operating income was due primarily to an increase in product net sales across all product lines, partially offset by an increase in selling and promotion expenses and an increase in R&D expenses. Our medical devices segment operating income in the first nine months of 2014 was $272.3 million, compared to operating income of $188.2 million in the first nine months of 2013. The $84.1 million increase in our medical devices segment operating income was due primarily to the same factors discussed above with respect to the increase in our medical devices operating income in the third quarter of 2014 compared to the third quarter of 2013. Non-Operating Income and Expense Total net non-operating income in the third quarter of 2014 was $26.6 million compared to total net non-operating expense of $33.4 million in the third quarter of 2013. Interest income increased $0.5 million to $2.0 million in the third quarter of 2014 compared to $1.5 million in the third quarter of 2013. Interest expense decreased $1.0 million to $18.4 million in the third quarter of 2014 compared to $19.4 million in the third quarter of 2013. Other, net income was $43.0 million in the third quarter of 2014, consisting primarily of net gains on foreign currency derivative instruments and other foreign currency transactions. Other, net expense was $15.5 million in the third quarter of 2013, consisting primarily of net losses on foreign currency derivative instruments and other foreign currency transactions. Total net non-operating expense in the first nine months of 2014 was $27.2 million compared to total net non-operating expense of $64.7 million in the first nine months of 2013. Interest income increased $1.1 million to $6.2 million in the first nine months of 2014 compared to $5.1 million in the first nine months of 2013. Interest expense decreased $3.0 million to $53.8 million in the first nine months of 2014 compared to $56.8 million in the first nine months of 2013. Interest expense decreased primarily due to a decrease in accrued statutory interest resulting from a change in estimate related to uncertain tax positions, partially offset by an increase in interest expense primarily due to the issuance in March 2013 of our 1.35% Senior Notes due 2018, or 2018 Notes, and our 2.80% Senior Notes due 2023, or 2023 Notes. Other, net income was $20.4 million in the first nine months of 2014, consisting primarily of net gains on foreign currency derivative instruments and other foreign currency transactions. Other, net expense was $13.0 million in the first nine months of 2013, consisting primarily of $10.1 million in net losses on foreign currency derivative instruments and other foreign currency transactions and a loss of $3.7 million related to the impairment of a non-marketable third party equity investment, partially offset by a gain of $0.7 million on the sale of a third party equity investment. Income Taxes Our effective tax rate for the third quarter of 2014 was 25.3%. Our effective tax rate for the first nine months of 2014 was 27.0%. Included in our earnings before income taxes for the first nine months of 2014 are a $65.0 million upfront payment for the in-licensing of in-process research and development technologies from Medytox, a $15.0 million development milestone payment associated with the technologies in-licensed from Medytox, a $10.0 million expense for the purchase of an in-process research and development asset, a $37.3 million charge for estimated bad debts in Venezuela, restructuring charges of $208.3 million, $20.9 million of other expenses associated with the July 2014 restructuring plan, $10.3 million of other expenses for the January 2014 realignment of certain business and $15.5 million of income related to changes in the fair value of contingent consideration associated with certain business combination agreements. In the first nine months of 2014 we recorded no income tax benefits related to the upfront payment for the in-licensing of technology from Medytox, the development milestone payment associated with the technologies in-licensed from Medytox, or for the changes in the fair value of contingent consideration liabilities, $3.4 million of income tax benefits related to the expense for the purchase of an in-process research and development asset, $5.0 million of income tax benefits related to the estimated bad debts in Venezuela, $57.2 million of estimated income tax benefits related to the restructuring charges, $6.4 million of income tax benefits related to other costs associated with the July 2014 restructuring plan and $3.6 million of income tax benefits related to other expenses associated with the January 2014 realignment of certain business functions. In the first nine months of 2014, we also recorded income tax benefits of $13.6 million for changes in estimated taxes related to tax positions included in prior year filings, which resulted primarily from the re-measurement of certain transfer pricing positions. The estimated income tax benefits related to the restructuring charges may be subject to change based on a final analysis of cost allocations by statutory jurisdiction to be determined as part of our year-end income tax calculations. Excluding the impact of the pre-tax charges of $351.3 million and the income tax benefits of $89.2 million for the items discussed above, our adjusted effective tax rate for the first nine months of 2014 was 26.6%. We believe that the use of an adjusted effective tax rate provides a more meaningful measure of the impact of income taxes on our results of operations because it excludes the effect of certain items that are not included as part of our core business activities. This allows investors to better determine the effective tax rate associated with our core business activities. 47-------------------------------------------------------------------------------- Table of Contents The calculation of our adjusted effective tax rate for the first nine months of 2014 is summarized below: (in millions) Earnings from continuing operations before income taxes, as reported $ 1,355.4 Upfront payment for the in-licensing of in-process research and development technologies from Medytox 65.0 Development milestone payment associated with technologies from Medytox 15.0 Expense for the purchase of an in-process research and development asset 10.0 Expense for estimated bad debts in Venezuela 37.3 Restructuring charges 208.3 Other expenses associated with the July 2014 restructuring plan 20.9 Other expenses associated with the January 2014 realignment of certain business functions 10.3 Changes in the fair value of contingent consideration liabilities related to business combinations (15.5 ) $ 1,706.7 Provision for income taxes, as reported $ 365.4 Income tax benefit for: Upfront payment for the in-licensing of in-process research and development technologies from Medytox - Development milestone payment associated with technologies from Medytox - Expense for the purchase of an in-process research and development asset 3.4 Expense for estimated bad debts in Venezuela 5.0 Restructuring charges 57.2 Other expenses associated with the July 2014 restructuring plan 6.4 Other expenses associated with the January 2014 realignment of certain business functions 3.6 Changes in the fair value of contingent consideration liabilities related to business combinations - Changes in estimated taxes related to tax positions included in prior year filings 13.6 $ 454.6 Adjusted effective tax rate 26.6 % Our effective tax rates for the third quarter and first nine months of 2013 were 27.1% and 25.6%, respectively. Our effective tax rate for the year ended December 31, 2013 was 26.5%. Included in our earnings before income taxes for 2013 are charges related to changes in the fair value of contingent consideration associated with certain business combination agreements of $70.7 million, the fair market value inventory adjustment rollout related to the acquisition of SkinMedica of $8.9 million, external costs of stockholder derivative litigation associated with the 2010 global settlement with the DOJ regarding our past U.S. sales and marketing practices relating to certain therapeutic uses of Botox® and other legal contingency expenses of $3.1 million, transaction and integration costs associated with business combinations and license agreements of $20.6 million, a loss of $3.7 million related to the impairment of a non-marketable third party equity investment and restructuring charges of $5.5 million. In 2013 we recorded no income tax benefit related to the changes in the fair value of contingent consideration liabilities, $3.3 million of income tax benefits related to the fair market value inventory adjustment rollout related to the acquisition of SkinMedica, no income tax benefits related to external costs of stockholder derivative litigation associated with the 2010 global settlement with the DOJ regarding our past U.S. sales and marketing practices relating to certain therapeutic uses of Botox® and other legal contingency expenses, $4.8 million of income tax benefits related to transaction and integration costs associated with business combinations and license agreements, $1.3 million of income tax benefits related to the impairment of a non-marketable third party equity investment and $1.7 million of income tax benefits related to the restructuring charges. In 2013, we also recorded an income tax benefit of $15.1 million for the retroactive benefit of the U.S. federal research and development tax credit for the 2012 fiscal year that was signed into law on January 2, 2013. Excluding the impact of the aggregate pre-tax charges of $112.5 million and the income tax benefits of $26.2 million for the items discussed above, our adjusted effective tax rate for 2013 was 26.3%. 48-------------------------------------------------------------------------------- Table of Contents The calculation of our adjusted effective tax rate for the year ended December 31, 2013 is summarized below: 2013 (in millions) Earnings from continuing operations before income taxes, as reported $ 1,730.8 Changes in the fair value of contingent consideration liabilities related to business combinations 70.7 Fair market value inventory adjustment rollout related to the acquisition of SkinMedica 8.9 External costs for stockholder derivative litigation and other legal contingency expenses 3.1 Transaction and integration costs associated with business combinations and license agreements 20.6 Impairment of a non-marketable third party equity investment 3.7 Restructuring charges 5.5 $ 1,843.3 Provision for income taxes, as reported $ 458.3 Income tax benefit for: Changes in the fair value of contingent consideration liabilities related to business combinations - Fair market value inventory adjustment rollout related to the acquisition of SkinMedica 3.3 External costs for stockholder derivative litigation and legal contingency expenses - Transaction and integration costs associated with business combinations and license agreements 4.8 Impairment of a non-marketable third party equity investment 1.3 Restructuring charges 1.7 2012 retroactive U.S. federal research and development tax credit 15.1 $ 484.5 Adjusted effective tax rate 26.3 % The increase in the adjusted effective tax rate to 26.6% in the first nine months of 2014 compared to the adjusted effective tax rate for the year ended December 31, 2013 of 26.3% is primarily due to the negative impact of the expiration of the U.S. federal research and development tax credit, partially offset by a beneficial change in estimates of certain transfer-pricing positions related to prior years and associated provision to return adjustments. We anticipate that our adjusted effective tax rate for the fiscal year 2014 may decline due to changes in the mix of pre-tax earnings in the various countries in which we operate. Earnings from Continuing Operations Our earnings from continuing operations in the third quarter of 2014 were $313.1 million compared to earnings from continuing operations of $332.9 million in the third quarter of 2013. The $19.8 million decrease in earnings from continuing operations was primarily the result of the decrease in operating income of $97.4 million, partially offset by the decrease in net non-operating expense of $60.0 million and the decrease in the provision for income taxes of $17.6 million. Our earnings from continuing operations in the first nine months of 2014 were $990.0 million compared to earnings from continuing operations of $959.9 million in the first nine months of 2013. The $30.1 million increase in earnings from continuing operations was primarily the result of the increase in operating income of $28.1 million and the decrease in net non-operating expense of $37.5 million, partially offset by the increase in the provision for income taxes of $35.5 million. Net Earnings Attributable to Noncontrolling Interest Our net earnings attributable to noncontrolling interest for our majority-owned subsidiaries were $0.9 million and $1.0 million in the third quarter of 2014 and 2013, respectively, and $2.7 million and $4.2 million in the first nine months of 2014 and 2013, respectively. Discontinued Operations On February 1, 2013, we formally committed to pursue a sale of our obesity intervention business unit, including the assets related to the Lap-Band® gastric band system and the Orbera™ intra-gastric balloon system. Accordingly, beginning in the first quarter of 2013, we have reported the financial results from that business unit as discontinued operations in the consolidated statements of earnings. In the first quarter of 2013, we reported an estimated pre-tax disposal loss of $346.2 million ($259.0 million 49-------------------------------------------------------------------------------- Table of Contents after tax) related to the obesity intervention business unit from the write-down of the net assets held for sale to their estimated fair value less costs to sell. In the third quarter of 2013, we recorded an additional pre-tax disposal loss of $58.7 million ($37.6 million after tax) from the write-down of the net assets held for sale to their estimated fair value. On December 2, 2013, we completed the sale of the obesity intervention business to Apollo Endosurgery, Inc., or Apollo, for cash consideration of $75.0 million, subject to certain adjustments, and certain additional consideration, including a minority equity interest in Apollo with an estimated fair value of $15.0 million and contingent consideration of up to $20.0 million to be paid by Apollo upon the achievement of certain regulatory and sales milestones. At the closing date, the cash consideration was reduced by the amount of inventories held outside of the United States of $7.6 million and net trade accounts receivable and payable of $19.4 million, which we retained pursuant to the sale and transition services agreements with Apollo. We expect to realize the value of these retained assets in the normal course of business within one year from the closing date. For the year ended December 31, 2013, we reported a total pre-tax loss of $408.2 million ($297.9 million after tax) on the disposal of the obesity intervention business unit net assets. The pre-tax loss includes transaction costs of approximately $2.6 million, consisting primarily of investment banking fees. In the first quarter of 2014, we recognized an additional pre-tax loss of $0.9 million ($0.6 million after tax), and in the third quarter of 2014, an additional pre-tax gain of $0.3 million ($0.3 million after tax), on the disposal of the obesity intervention business unit net assets. In connection with the sale of the obesity intervention business, we also entered into certain transitional service agreements designed to facilitate the orderly transfer of business operations to Apollo. These agreements primarily relate to administrative services in the United States and distribution services outside of the United States, all of which are generally to be provided for a period of up to 12 months. We will also manufacture and supply products to Apollo for a transitional period not to exceed 24 months in order to allow Apollo adequate time to obtain regulatory approval for licenses and manufacturing facilities. The continuing cash flows from these agreements are not significant. Net sales made pursuant to the manufacturing and distribution agreements are recorded as product net sales in the consolidated statements of earnings and are reflected as other medical devices product net sales. The results of operations from discontinued operations presented below include certain allocations that management believes fairly reflect the utilization of services provided to the obesity intervention business. The allocations do not include amounts related to general corporate administrative expenses or interest expense. Therefore, the results of operations from the obesity intervention business unit do not necessarily reflect what the results of operations would have been had the business operated as a stand-alone entity. The following table summarizes the results of operations from discontinued operations for the three and nine month periods ended September 30, 2013: September 30, 2013 Three Months Nine Months (in millions) Product net sales $ 29.3 $ 94.5 Operating costs and expenses: Cost of sales (excludes amortization of intangible assets) 5.4 15.9 Selling, general and administrative 14.4 44.8 Research and development 1.3 4.0 Amortization of intangible assets - 10.3 Earnings from discontinued operations before income taxes $ 8.2 $ 19.5 Earnings from discontinued operations, net of income taxes $ 5.5 $ 13.1 Liquidity and Capital Resources We assess our liquidity by our ability to generate cash to fund our operations. Significant factors in the management of liquidity are: funds generated by operations; levels of accounts receivable, inventories, accounts payable and capital expenditures; funds available under our credit facilities; the extent of our stock repurchase program; global economic conditions; funds required for acquisitions and other transactions; and financial flexibility to attract long-term capital on satisfactory terms. 50-------------------------------------------------------------------------------- Table of Contents Cash Flow Historically, we have generated cash from operations in excess of working capital requirements. The net cash provided by operating activities for the first nine months of 2014 was $1,233.6 million compared to $1,180.1 million for the first nine months of 2013. Cash flow from operating activities increased in the first nine months of 2014 compared to the first nine months of 2013 primarily as a result of an increase in cash from net earnings from operations, including the effect of adjusting for non-cash items, and a decrease in cash required to fund changes in trade receivables and accrued expenses, partially offset by an increase in cash used to fund changes in other current assets, other non-current assets, accounts payable, income taxes and other liabilities. In the first nine months of 2014, we made upfront and milestone payments of $80.0 million related to a license agreement and an upfront payment of $10.0 million for the purchase of certain dermal filler technology under development that has not achieved regulatory approval, which were included in our net earnings for the first nine months of 2014. In the first nine months of 2013, we made an upfront payment of $6.5 million for a license and collaboration agreement, which was included in our net earnings for the first nine months of 2013. In the first nine months of 2014 and 2013, we paid pension contributions of $20.6 million and $22.0 million, respectively, to our U.S. defined benefit pension plan. Net cash provided by investing activities was $38.1 million in the first nine months of 2014 compared to net cash used in investing activities of $1,262.0 million in the first nine months of 2013. In the first nine months of 2014, we received $1,596.3 million from the maturities of short-term investments and collected $1.8 million from the 2013 sale of the obesity intervention business. In the first nine months of 2014, we purchased $1,269.8 million of short-term investments, paid $67.5 million for the acquisition of LiRIS, paid $10.0 million for a non-marketable equity investment and $15.0 million for licensing and developed technology intangible assets. Additionally, we invested $185.4 million in new facilities and equipment and $12.6 million in capitalized software. In the first nine months of 2013, we received $380.5 million from the maturities of short-term investments. In the first nine months of 2013, we purchased $644.5 million of short-term investments and paid $889.7 million, net of cash acquired, for the acquisitions of MAP and Exemplar, and $2.4 million for purchase price adjustments related to prior acquisitions. Additionally, we invested $97.4 million in new facilities and equipment and $8.6 million in capitalized software. We currently expect to invest between approximately $200 million and $250 million in capital expenditures for manufacturing and administrative facilities, manufacturing equipment and other property, plant and equipment during 2014. Net cash used in financing activities was $387.4 million in the first nine months of 2014 compared to net cash provided by financing activities of $70.8 million in the first nine months of 2013. In the first nine months of 2014, we repurchased approximately 6.1 million shares of our common stock for $835.1 million, paid $44.7 million in dividends to stockholders and paid contingent consideration of $10.2 million. This use of cash was partially offset by $0.2 million in net borrowings of notes payable, $388.3 million received from the sale of stock to employees and $114.1 million in excess tax benefits from share-based compensation. On March 12, 2013, we issued concurrently in a registered offering $250.0 million in aggregate principal amount of our 2018 Notes and $350.0 million in aggregate principal amount of our 2023 Notes, and received total proceeds of $598.5 million, net of original discounts. Additionally, in the first nine months of 2013, we received $160.1 million from the sale of stock to employees and $33.6 million in excess tax benefits from share-based compensation. These amounts were partially reduced by the repurchase of approximately 6.1 million shares of our common stock for $649.3 million, a cash payment of $4.8 million for offering fees related to the issuance of the 2018 Notes and the 2023 Notes, $44.6 million in dividends paid to stockholders, net repayments of notes payable of $11.6 million and payments of contingent consideration of $11.1 million. As of September 30, 2014, $2,891.4 million of our existing cash and equivalents and short-term investments are held by non-U.S. subsidiaries. We currently plan to use these funds indefinitely in our operations outside the United States. Withholding and U.S. taxes have not been provided for unremitted earnings of certain non-U.S. subsidiaries because we have reinvested these earnings indefinitely in such operations. At December 31, 2013, we had approximately $3,828.0 million in unremitted earnings outside the United States for which withholding and U.S. taxes were not provided. Tax costs would be incurred if these earnings were remitted to the United States. Debt Outstanding and Borrowing Capacity Our 5.75% Senior Notes due 2016, or 2016 Notes, were sold at 99.717% of par value with an effective interest rate of 5.79%, pay interest semi-annually on the principal amount of the notes at a rate of 5.75% per annum, and are redeemable at any time at our option, subject to a make-whole provision based on the present value of remaining interest payments at the time of the redemption. The aggregate outstanding principal amount of the 2016 Notes will be due and payable on April 1, 2016, unless earlier redeemed by us. In September 2012, we terminated the $300.0 million notional amount interest rate swap related to the 2016 Notes and received $54.7 million, which included accrued interest of $3.7 million. Upon termination of the interest rate swap, we added the net fair value received of $51.0 million to the carrying value of the 2016 Notes. The amount received for the termination of the interest rate swap is being amortized as a reduction to interest expense over the remaining life of the debt, which effectively fixes the interest rate for the remaining term of the 2016 Notes at 3.94%. 51-------------------------------------------------------------------------------- Table of Contents Our 2018 Notes, which were sold at 99.793% of par value with an effective interest rate of 1.39%, are unsecured and pay interest semi-annually on the principal amount of the notes at a rate of 1.35% per annum, and are redeemable at any time at our option, subject to a make-whole provision based on the present value of remaining interest payments at the time of the redemption. The aggregate outstanding principal amount of the 2018 Notes will be due and payable on March 15, 2018, unless earlier redeemed by us. Our 3.375% Senior Notes due 2020, or 2020 Notes, which were sold at 99.697% of par value with an effective interest rate of 3.41%, are unsecured and pay interest semi-annually on the principal amount of the notes at a rate of 3.375% per annum, and are redeemable at any time at our option, subject to a make-whole provision based on the present value of remaining interest payments at the time of the redemption. The aggregate outstanding principal amount of the 2020 Notes will be due and payable on September 15, 2020, unless earlier redeemed by us. Our 2023 Notes, which were sold at 99.714% of par value with an effective interest rate of 2.83%, are unsecured and pay interest semi-annually on the principal amount of the notes at a rate of 2.80% per annum, and are redeemable at any time at our option, subject to a make-whole provision based on the present value of remaining interest payments at the time of the redemption, if the redemption occurs prior to December 15, 2022 (three months prior to the maturity of the 2023 Notes). If the redemption occurs on or after December 15, 2022, then such redemption is not subject to the make-whole provision.The aggregate outstanding principal amount of the 2023 Notes will be due and payable on March 15, 2023, unless earlier redeemed by us. At September 30, 2014, we had a committed long-term credit facility, a commercial paper program, a shelf registration statement that allows us to issue additional securities, including debt securities, in one or more offerings from time to time, a real estate mortgage and various foreign bank facilities. Our committed long-term credit facility will expire in October 2016. The termination date can be further extended from time to time upon our request and acceptance by the issuer of the facility for a period of one year from the last scheduled termination date for each request accepted. The committed long-term credit facility allows for borrowings of up to $800.0 million. The commercial paper program also provides for up to $800.0 million in borrowings. However, our combined borrowings under our committed long-term credit facility and our commercial paper program may not exceed $800.0 million in the aggregate. Borrowings under the committed long-term credit facility are subject to certain financial and operating covenants that include, among other provisions, maximum leverage ratios. Certain covenants also limit subsidiary debt. We believe we were in compliance with these covenants at September 30, 2014. At September 30, 2014, we had no borrowings under our committed long-term credit facility, $20.0 million in borrowings outstanding under the real estate mortgage, $55.8 million in borrowings outstanding under various foreign bank facilities and no borrowings under the commercial paper program. Commercial paper, when outstanding, is issued at current short-term interest rates. Additionally, any future borrowings that are outstanding under the long-term credit facility may be subject to a floating interest rate. We may from time to time seek to retire or purchase our outstanding debt. Dividends and Stock Repurchase Program Effective October 27, 2014, our Board of Directors declared a cash dividend of $0.05 per share, payable December 11, 2014 to stockholders of record on November 20, 2014. We maintain an evergreen stock repurchase program. Our evergreen stock repurchase program authorizes us to repurchase our common stock for the primary purpose of funding our stock-based benefit plans. Under the stock repurchase program, we may maintain up to 18.4 million repurchased shares in our treasury account at any one time. At September 30, 2014, we held approximately 10.0 million treasury shares under this program. Pursuant to our evergreen stock repurchase program, we entered into certain stock repurchase plans that authorized our brokers to purchase our common stock traded in the open market. The terms of the plans set forth an aggregate maximum limit of 6.0 million shares to be repurchased in the first half of 2014, and the aggregate maximum limit of the plans has been satisfied. Trade Receivables Supplemental Information We sell products to public and semi-public hospitals in Italy and Spain, which are wholly or partially funded by their respective sovereign governments. The following table provides information related to trade receivables outstanding as of September 30, 2014 from product net sales in Italy and Spain: 52-------------------------------------------------------------------------------- Table of Contents Italy Spain (in millions)Trade receivables from public and semi-public hospitals primarily funded by the sovereign government $ 16.8 $ 14.8 Trade receivables from other customers 7.6 15.2 Total trade receivables $ 24.4 $ 30.0 Amount of trade receivables that is past due $ 13.7 $ 13.5 Allowance for doubtful accounts $ 5.2 $ 0.8 We believe the reserves established against these trade receivables are sufficient to cover the amounts that will ultimately be uncollectible. However, the economic stability in these countries is unpredictable and we cannot provide assurance that additional allowances will not be necessary if current economic conditions in these countries continue to decline. Negative changes in the amount of allowances for doubtful accounts could adversely affect our future results of operations. As of September 30, 2014, we have no significant trade accounts receivable from customers in Greece or Portugal that are primarily funded by their respective sovereign governments. In the third quarter of 2014, we recorded an estimated bad debt charge of $37.3 million related to certain U.S. dollar denominated trade receivables from local customers in Venezuela. The estimated charge for bad debts was based on an analysis of our U.S. dollar denominated trade receivable payment and non-payment trends over the last 12 months in relation to currency exchange controls administered by the National Center for Foreign Commerce, or CENCOEX, a Venezuela government body, and our review of other relevant communications by CENCOEX and economic data regarding the current state of Venezuela's economy. Based on our analysis, we concluded that the likelihood of a bad debt loss for our U.S. dollar denominated trade receivables generated prior to October 2013 was probable. Trade receivables generated from product sales in Venezuela subsequent to September 2013 have been paid on a regular basis by CENCOEX at the published preferred exchange rate for pharmaceutical products, so we are continuing to supply certain products to our one major distributor, a sizeable multinational corporation, within self-imposed credit limits, under the assumption that CENCOEX will continue to allow U.S. dollar denominated trade receivables, which are properly registered with CENCOEX, to be paid within normal trade terms. We are continuing to make efforts to collect the outstanding older trade receivables that have been reserved, and any future recovery will be recorded when realized. As of September 30, 2014, we had net trade receivables from a commercial distributor in Venezuela of approximately $10.5 million, which are subject to currency exchange controls administered by CENCOEX. The payment of our trade receivables is required to be approved through CENCOEX's administration of monthly allocations of foreign currency provided by the Central Bank of Venezuela. Our trade receivables are subject to future potential currency devaluation actions that could be taken by the Venezuelan government, which have occurred several times in the past. The agreement with our distributor contains certain terms that limit our exposure to devaluation risk, but because of the unpredictable economic stability in Venezuela, our trade receivables in Venezuela may become subject to a material devaluation. Acquisitions and Collaborations On August 13, 2014, we completed the acquisition of LiRIS for an upfront payment of $67.5 million plus up to an aggregate of $295.0 million in payments contingent upon achieving certain future development milestones and up to an aggregate of $225.0 million in payments contingent upon achieving certain commercial milestones. The estimated fair value of the contingent consideration as of the acquisition date was $192.5 million. On September 25, 2013, we announced that we had entered into a license agreement with Medytox, Inc., or Medytox, contingent on obtaining certain government approvals. In January 2014, we closed the transaction. Under the terms of the agreement, we made an upfront payment to Medytox of $65.0 million in January 2014 and Medytox granted us exclusive rights, worldwide outside of Korea with co-exclusive rights in Japan, to develop and, if approved, commercialize certain neurotoxin product candidates currently in development, including a potential liquid-injectable product. The terms of the agreement also include potential future development milestone payments of up to $116.5 million and potential future sales milestone payments of up to $180.5 million, as well as potential future royalty payments. In the third quarter of 2014, we made a development milestone payment to Medytox of $15.0 million. 53-------------------------------------------------------------------------------- Table of Contents Other Liquidity Matters As part of an ongoing effort to improve efficiency and productivity which will further increase stockholder value, in July 2014 we completed a global review of our structures and processes, portfolio of research and development projects and marketed products, and our geographies in an effort to prioritize the highest value investments. As a result of this review, we initiated a restructuring of our global operations that we estimate will deliver annual pre-tax savings of approximately $475 million in calendar year 2015. We currently estimate that we will incur total non-recurring pre-tax charges of between $350.0 million and $400.0 million in connection with the restructuring and other costs, of which $60.0 million and $70.0 million will be a non-cash charge. We began to incur these non-recurring charges in the third quarter of 2014 and expect to continue to incur them through the second quarter of 2015. A generic version of Zymaxid® was launched in the United States in October 2013. In addition, our products compete with generic versions of some branded pharmaceutical products sold by our competitors. We do not believe that our liquidity will be materially impacted in 2014 by generic competition. At December 31, 2013, we had net pension and postretirement benefit obligations totaling $237.5 million. Future funding requirements are subject to change depending on the actual return on net assets in our funded pension plans and changes in actuarial assumptions. In 2014, we expect to pay pension contributions of between $30.0 million and $40.0 million for our U.S. and non-U.S. pension plans and between $1.0 million and $2.0 million for our other postretirement plan. In October 2014, we announced that we have amended our U.S. qualified and unqualified defined benefit pension plans to close the plans to any future participant service credits (plan freeze), effective December 31, 2014. In conjunction with the plan freeze, we will be adding one additional year of service credit to the calculation of benefits for all active employees as of December 31, 2014. We currently estimate that we will incur pre-tax curtailment charges of approximately $17.0 million in the fourth quarter of 2014 related to the plan freeze. We believe that the net cash provided by operating activities, supplemented as necessary with borrowings available under our existing credit facilities and existing cash and equivalents and short-term investments, will provide us with sufficient resources to meet our current expected obligations, working capital requirements, debt service and other cash needs over the next year. 54-------------------------------------------------------------------------------- Table of Contents ALLERGAN, INC. |