AbbVie 2013 Annual Report Download - page 48

entered into interest rate swaps with various financial institutions, which converted $8.0 billion of its
fixed rate interest rate debt to floating interest rate debt. In addition, AbbVie issued $1.0 billion of
commercial paper in the fourth quarter of 2012. The balance of commercial paper outstanding at
December 31, 2013 was $400 million.
Interest expense, net in 2012 of $84 million was comprised primarily of interest expense on outstanding
debt and bridge facility fees related to the separation from Abbott, partially offset by interest income of
$20 million.
Other (Income) Expense
Other (income) expense, net, included expenses of $11 million in 2013, $29 million in 2012 and
$56 million in 2011 of fair value adjustments to the contingent consideration related to an acquisition
of a business in 2010. Other (income) expense, net, for 2013, 2012 and 2011 also included ongoing
contractual payments associated with the conclusion of a preexisting joint venture arrangement
dissolved in 2008. Other (income) expense, net, in 2012 included income of $21 million from the
resolution of a contractual agreement and a loss of $52 million for the impairment of an equity
security.
Income Tax Expense
The income tax rates were 22.6 percent in 2013, 7.9 percent in 2012 and 6.4 percent in 2011. Income
taxes in 2012 and 2011 included the recognition of tax benefits totaling approximately $195 million and
$410 million, respectively, as a result of favorable resolutions of various tax positions pertaining to prior
years. The increase in the effective tax rate in 2013 over 2012 is principally due to income tax expense
related to certain 2013 earnings outside the United States that are not expected to be indefinitely
reinvested and the absence of the $195 million of tax benefits recorded in 2012 as a result of the
favorable resolution of various tax positions pertaining to a prior year. Income taxes in 2011 also
reflected the non-deductibility of a litigation reserve.
Transition from Abbott and Cost to Operate as an Independent Company
AbbVie’s historical financial statements for periods prior to January 1, 2013 are presented on a
combined basis and reflect AbbVie’s financial position, results of operations and cash flows as its
business was operated as part of Abbott, rather than as an independent company. AbbVie has and will
continue to incur additional ongoing operating expenses to operate as an independent company,
including the cost of various corporate headquarters functions, incremental information technology-
related costs, and incremental costs to operate a stand-alone back office infrastructure outside the
United States.
AbbVie’s transition services agreements with Abbott in the United States cover certain corporate
support services that AbbVie has historically received from Abbott. Such services include information
technology, accounts payable, payroll, and other financial functions, as well as engineering support for
various facilities, quality assurance support, and other administrative services. The terms of the services
under the agreements vary by activity. These agreements facilitate the separation by allowing AbbVie to
operate independently prior to establishing stand-alone back office functions across its organization.
As of the date of the separation, AbbVie did not have sufficient back office infrastructure to operate in
markets outside the United States. As a result, AbbVie entered into transition services agreements with
Abbott to provide services outside the United States, including back office services in certain countries,
for up to two years after separation. The back office services provided include information technology,
accounts payable, payroll, receivables collection, treasury and other financial functions, as well as order
entry, warehousing, and other administrative services. These transition services agreements have
allowed AbbVie to operate its international pharmaceuticals business independently prior to
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