Abbott Laboratories 2012 Annual Report Download - page 57

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Abbott 2012 Annual Report
An additional $38 million, $102 million and $12 million were recorded in
2012, 2011 and 2010, respectively, relating to these restructurings, pri-
marily for additional employee severance and accelerated depreciation.
In 2011 and 2008, Abbott management approved plans to streamline
global manufacturing operations, reduce overall costs, and improve
efficiencies in Abbott’s core diagnostic business. In 2011, a charge
of $28 million was recorded in Cost of products sold. The following
summarizes the activity for these restructurings:
(dollars in millions)
Accrued balance at January 1, 2010 $ 98
Payments and other adjustments (10)
Accrued balance at December 31, 2010 88
2011 restructuring charge 28
Payments and other adjustments (37)
Accrued balance at December 31, 2011 79
Payments and other adjustments (23)
Accrued balance at December 31, 2012 $ 56
In addition, charges of approximately $16 million, $42 million and
$60 million were recorded in 2012, 2011 and 2010, primarily for accel-
erated depreciation and product transfer costs.
Interest expense and Interest (income)
In 2012, interest expense increased primarily due to bridge facility
fees related to the separation of AbbVie from Abbott. In 2011, interest
expense decreased due to lower debt levels. Interest income in 2012
and 2011 decreased as a result of lower rates. In 2010, interest
expense increased due primarily to increased debt levels. Interest
income decreased in 2010 due to lower investment balances.
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 subsid-
iaries 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. The cumulative effect of the change was an increase in
retained earnings of $289 million as of January 1, 2009 and a corre-
sponding decrease in other long-term liabilities. The impact of the
change was not material to the results of operations for the previously
reported annual and interim periods after January 1, 2009, and thus,
those results have not been revised. A charge of $137 million was
recorded to Other (income) expense, net in 2011 to recognize the
cumulative immaterial impacts to 2009 and 2010. Had the financial
statements been revised, net sales, operating earnings and net earn-
ings in 2010 would have decreased by $21 million, $195 million and
$175 million, respectively.
Other (income) expense, net, for 2012 includes income of approxi-
mately $60 million from the resolution of a contractual agreement and
a loss of approximately $62 million for the impairment of certain equity
securities. Other (income) expense, net, for 2011 includes $56 million
of fair value adjustments and accretion in the contingent consideration
related to the acquisition of Solvay’s pharmaceutical business. Other
(income) expense, net, for 2012, 2011 and 2010 also includes ongo-
ing contractual payments from Takeda associated with the conclusion
of the TAP joint venture.
Net Loss on Extinguishment of Debt
In the fourth quarter of 2012, Abbott extinguished $7.7 billion of
long-term debt. Abbott 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 were 4.8 percent in 2012, 9.0 per-
cent in 2011 and 19.0 percent in 2010. Taxes on earnings in 2012
reflect the $493 million effect of the tax rate applied to Abbott’s net
debt extinguishment loss as well as the recognition of $408 million of
tax benefits as a result of the favorable resolution of various tax posi-
tions pertaining to a prior year, which also decreased the gross
amount of unrecognized tax benefits by approximately $560 million.
Taxes on earnings in 2011 reflect the effect of the tax rate applied to
a litigation reserve and the recognition of $580 million of tax benefits
as a result of the favorable resolution of various tax positions pertaining
to prior years, which also decreased the gross amount of unrecog-
nized tax benefits by approximately $1.3 billion. 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 foreign
tax rates and tax exemptions that reduced the tax rates by 24.9, 22.9,
and 19.4 percentage points in 2012, 2011 and 2010, 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 5 to the consolidated financial statements
for a full reconciliation of the effective tax rate to the U.S. federal
statutory rate.
As a result of the American Taxpayer Relief Act of 2012 signed into
law in January 2013, Abbott expects to record a tax benefit of
approximately $100 million in the first quarter of 2013 for the retroac-
tive 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. Excluding this and any other discrete items, Abbott expects
to apply an annual effective rate of approximately 21 percent.
As a result of the Patient Protection and Affordable Care Act and the
Health Care and Education Reconciliation Act which were signed into
law in 2010, Abbott recorded a charge of approximately $60 million in
2010 to reduce deferred tax assets associated with retiree health care
liabilities related to the Medicare Part D retiree drug subsidy.
In October 2010, Puerto Rico enacted legislation that assesses a tax
beginning in 2011 on certain products manufactured in Puerto Rico.
The tax is levied on gross intercompany purchases from Puerto Rican
entities and is included in inventory costs. In 2012 and 2011, cost of
goods sold included $187 million and $111 million, respectively,
related to this tax. The tax is creditable for U.S. income tax purposes.
Financial Review