Abbott Laboratories 2012 Annual Report Download - page 62

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Abbott 2012 Annual Report
Financial Review
For 2010, the reductions in cash and cash equivalents due to the
effect of exchange rate changes was primarily driven by the impact
of changes in the value of the U.S. dollar compared to the euro on
non-dollar denominated cash and cash equivalents. While future fluc-
tuations in the value of the U.S. dollar against foreign currencies could
have a substantial effect on the dollar value of Abbott’s cash and cash
equivalents, such fluctuations are not expected to materially impact
Abbott’s liquidity.
Debt and Capital
At December 31, 2012, Abbott’s long-term debt rating was A+ by
Standard & Poor’s Corporation and A1 by Moody’s Investors Service.
In 2012, Abbott replaced unused lines of credit of $3.0 billion and
$3.7 billion that were to expire in October 2012 and in 2013, respec-
tively, with two five-year credit facilities totaling $7.0 billion that support
commercial paper borrowing arrangements. One of the credit facilities
totaling $2.0 billion will support AbbVie commercial paper borrowings
after separation and expired for Abbott at the separation of AbbVie
from Abbott on January 1, 2013.
In 2012, Abbott redeemed $7.7 billion of long-term notes in prepara-
tion for the separation of AbbVie from Abbott and repaid $1 billion
of long-term notes that were due in 2012. In addition, AbbVie Inc.,
a wholly owned subsidiary of Abbott, issued $14.7 billion of long-term
notes that were guaranteed by Abbott until AbbVie’s separation from
Abbott on January 1, 2013. In 2011, Abbott repaid $2.0 billion of long-
term notes using primarily short-term borrowings. Under a registration
statement filed with the Securities and Exchange Commission in
February 2009, Abbott issued $3.0 billion of long-term debt in the sec-
ond quarter of 2010 with maturity dates in 2015, 2020 and 2040 and
interest rates of 2.7 percent, 4.125 percent and 5.3 percent, respec-
tively. The debt due in 2015 was extinguished in 2012. Proceeds from
this debt were used to pay down short-term borrowings.
In October 2008, the board of directors authorized the purchase of up
to $5 billion of Abbott’s common shares from time to time. Under this
authorization, 37.0 million and 14.8 million shares were purchased in
2012 and 2010 at a cost of approximately $2.2 billion and $800 mil-
lion, respectively. No shares were purchased under this authorization
in 2011. Abbott plans to purchase shares from time to time in 2013.
The judgment entered in 2009 by the U.S. District Court for the
Eastern District of Texas against Abbott in its litigation with New York
University and Centocor, Inc. required Abbott to secure the judgment
in the event that its appeal to the Federal Circuit court was unsuccess-
ful in overturning the district court’s decision. In the first quarter of
2010, Abbott deposited $1.87 billion with an escrow agent and con-
sidered these assets to be restricted. On February 23, 2011, the
Federal Circuit reversed the district court’s final judgment and found
Centocor’s patent invalid. On April 25, 2011, Centocor petitioned the
Federal Circuit to rehear and reconsider the decision. In June 2011
the Federal Circuit denied Centocor’s petition and the restrictions on
the funds were lifted.
Goodwill
At December 31, 2012, goodwill recorded as a result of business
combinations totaled $15.8 billion. Goodwill is reviewed for impairment
annually or when an event that could result in an impairment occurs.
The results of the last impairment test indicated that the fair value of
each reporting unit was substantially in excess of its carrying value
except for the Medical Optics unit. While the fair value of the Medical
Optics business exceeds its carrying value, extended economic pres-
sure on government-reimbursed cataract procedures in Europe and
on the global LASIK surgery business as well as longer regulatory
approval timelines for products currently under development could
result in a valuation in the future where the fair value of the Medical
Optics unit has declined below its carrying value, thereby triggering the
requirement to estimate the implied fair value of the goodwill and mea-
sure for impairment.
Financial Condition
Cash Flow
Net cash from operating activities amounted to $9.3 billion, $9.0 billion
and $8.7 billion in 2012, 2011 and 2010, respectively. Trade accounts
payable and other liabilities in Net cash from operating activities in
2012 includes the payment of approximately $1.5 billion related to
a litigation accrual recorded in 2011. This was partially offset by
increases in other liabilities, primarily restructuring reserves. Income
taxes payable in 2012 and 2011 includes $408 million and $580 mil-
lion, respectively, of tax benefits related to the favorable resolution of
various tax positions pertaining to prior years. While substantially all
cash and cash equivalents at December 31, 2012 that will be retained
by Abbott after the separation and all cash and cash equivalents at
December 31, 2011 and 2010 is considered reinvested indefinitely
in foreign subsidiaries, Abbott does not expect such reinvestment to
affect its liquidity and capital resources. If these funds were needed
for operations in the U.S., Abbott would be required to accrue and
pay U.S. income taxes to repatriate these funds. Abbott believes
that it has sufficient sources of liquidity to support its assumption that
the disclosed amount of undistributed earnings at December 31, 2012
can be considered to be reinvested indefinitely. Abbott funded
$379 million in 2012, $394 million in 2011 and $525 million in 2010 to
defined pension plans. Abbott expects pension funding for its main
domestic pension plan of $170 million in 2013; the decrease primarily
reflects the separation of AbbVie and the transfer of certain plan
assets and liabilities to AbbVie. Abbott expects annual cash flow from
operating activities to continue to exceed Abbott’s capital expenditures
and cash dividends.