Abbott Laboratories 2013 Annual Report Download - page 66

ABBOTT 2013 ANNUAL REPORT
64
CHANGE IN ACCOUNTING PRINCIPLE AND
OTHER (INCOME) EXPENSE, NET
Prior to January 1, 2011, the accounts of foreign subsidiaries were
consolidated based on a fiscal year ended November 30 due to the
time needed to consolidate these subsidiaries. Effective January 1,
2011, the one month lag in the consolidation of the accounts of
foreign subsidiaries was eliminated and the year-end of foreign
subsidiaries was changed to December 31. Abbott believes that the
change in accounting principle related to the elimination of the
one month reporting lag is preferable because it results in more
contemporaneous reporting of the results of foreign subsidiaries.
In accordance with applicable accounting literature, a change
in subsidiaries’ year-end is treated as a change in accounting
principle and requires retrospective application. A charge of
$100 million was recorded to Other (income) expense, net in 2011
to recognize the cumulative immaterial impacts to 2009 and 2010.
Other (income) expense, net, for 2013 includes gains on sales of
investments; 2012 includes income of approximately $40 million
from the resolution of a contractual agreement.
NET LOSS ON EXTINGUISHMENT OF DEBT
In 2012, Abbott extinguished $7.7 billion of long-term debt and
incurred a cost of $1.35 billion to extinguish this debt, net of gains
from the unwinding of interest rate swaps related to the debt.
TAXES ON EARNINGS
The income tax rates on earnings from continuing operations
were 5.5 percent in 2013, (89.7) percent in 2012 and 8.9 percent
in 2011. 2013 taxes on earnings from continuing operations include
$234 million of tax benefit related to the resolution of various
tax positions from previous years. In addition, as a result of the
American Taxpayer Relief Act of 2012 signed into law in January
2013, Abbott recorded a tax benefit to taxes on continuing opera-
tions of approximately $103 million in 2013 for the retroactive
extension of the research tax credit and the look-through rules of
section 954(c)(6) of the Internal Revenue Code to the beginning of
2012. Taxes on earnings from continuing operations in 2012 reflect
the $472 million effect of the tax rate applied to Abbott’s net debt
extinguishment loss, as well as the recognition of $212 million of
tax benefits as a result of the favorable resolution of various tax
positions pertaining to a prior year. Taxes on earnings from con-
tinuing operations in 2011 reflect the recognition of $168 million
of tax benefits as a result of the favorable resolution of various tax
positions pertaining to prior years. Exclusive of these discrete
items, the effective rates are lower than the U.S. federal statutory
rate of 35 percent due primarily to the benefit of lower tax rates
and tax exemptions on foreign income that reduced the tax rates
by 18.0, 75.7, and 14.9 percentage points in 2013, 2012 and 2011,
respectively. The tax rate reductions are primarily derived from
operations in Puerto Rico, Switzerland, Ireland and Singapore
where Abbott benefits from a combination of favorable statutory
tax rules, tax rulings, grants, and exemptions. See Note 13 to the
consolidated financial statements for a full reconciliation of the
effective tax rate to the U.S. federal statutory rate.
In 2014 Abbott expects to repatriate approximately $2 billion of
2014 earnings generated outside the U.S. Abbott also expects to be
able to accelerate the utilization of deferred tax assets and thereby
reduce the cash taxes due in the U.S. on this repatriation to no
more than $150 million. This repatriation is projected to result in
approximately $550 to $600 million of additional tax expense in
Abbott’s 2014 Statement of Earnings. Excluding the tax effect of
this repatriation, Abbott expects to apply an annual effective rate
of approximately 19 percent to 2014 results.
SEPARATION OF ABBVIE INC.
On November 28, 2012, Abbott’s board of directors declared
a special dividend distribution of all of the outstanding shares of
common stock of AbbVie Inc. (AbbVie), the company formed to
hold Abbott’s research-based proprietary pharmaceuticals busi-
ness. For each Abbott common share held at the close of business
on December 12, 2012, Abbott shareholders received one share of
AbbVie stock on January 1, 2013. Abbott has received a ruling from
the Internal Revenue Service that the separation qualifies as a tax-
free distribution to Abbott and its U.S. shareholders for U.S. federal
income tax purposes.
The historical operating results of the research-based proprietary
pharmaceuticals business prior to separation are excluded from
Earnings from Continuing Operations and are presented on
the Earnings from Discontinued Operations line. Discontinued
operations include the results of AbbVie’s business except for
certain corporate overhead costs and certain costs associated
with transition services that will be provided by Abbott to AbbVie.
Discontinued operations also include other costs incurred by Abbott
to separate AbbVie as well as an allocation of interest assuming
a uniform ratio of consolidated debt to equity for all of Abbott’s
historical operations. The assets, liabilities, and cash flows of the
research-based proprietary pharmaceuticals business are included
in Abbott’s Consolidated Balance Sheet and its Consolidated
Statements of Cash Flows for periods prior to January 1, 2013.
The following is a summary of the assets and liabilities transferred
to AbbVie as part of the separation on January 1, 2013:
(in billions)
Assets:
Cash and cash equivalents $ 5.9
Investments 2.2
Trade receivables, less allowances 3.2
Inventories 0.7
Prepaid expenses, deferred income taxes,
and other current receivables 2.9
Net property and equipment 2.2
Intangible assets, net of amortization 2.3
Goodwill 6.1
Deferred income taxes and other assets 1.1
26.6
Liabilities:
Short‑term borrowings 1.0
Trade accounts payable and other current liabilities 5.2
Long‑term debt 14.6
Post‑employment obligations,
deferred income taxes and other long‑term liabilities 3.1
23.9
Net Assets Transferred to AbbVie Inc. $ 2.7
FINANCIAL REVIEW