Abbott Laboratories 2013 Annual Report Download - page 48

ABBOTT 2013 ANNUAL REPORT
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
In 2012, Abbott redeemed $7.7 billion of its outstanding notes.
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. In 2012, AbbVie Inc., a wholly owned subsidiary of Abbott,
issued $14.7 billion of long-term debt with maturities ranging from
3 to 30 years. The debt issued by AbbVie Inc. was guaranteed by
Abbott with the guarantee expiring when AbbVie Inc. separated
from Abbott on January 1, 2013.
Principal payments required on long-term debt outstanding
at December 31, 2013 are $9 million in 2014, $10 million in 2015,
$3 million in 2016, $1 million in 2017, $1 million in 2018 and
$3.3 billion in 2019 and thereafter.
At December 31, 2013, Abbott’s long-term debt rating was A+
by Standard & Poor’s Corporation and A1 by Moody’s Investors
Service. Abbott has readily available financial resources, including
unused lines of credit of $5.0 billion that support commercial
paper borrowing arrangements which expire in 2017. Abbott’s
weighted-average interest rate on short-term borrowings was 0.2%
at December 31, 2013 and 0.4% at December 31, 2012 and 2011.
NOTE 10 — FINANCIAL INSTRUMENTS, DERIVATIVES AND
FAIR VALUE MEASURES
Certain Abbott foreign subsidiaries enter into foreign currency
forward exchange contracts to manage exposures to changes in
foreign exchange rates for anticipated intercompany purchases
by those subsidiaries whose functional currencies are not the U.S.
dollar. These contracts, totaling $137 million at December 31, 2013,
and $1.6 billion at December 31, 2012, are designated as cash
flow hedges of the variability of the cash flows due to changes in
foreign exchange rates and are recorded at fair value. Contracts
totaling $1.0 billion were transferred to AbbVie as part of the
separation on January 1, 2013. Accumulated gains and losses
as of December 31, 2013 will be included in Cost of products sold
at the time the products are sold, generally through the next
twelve months. The amount of hedge ineffectiveness was not
significant in 2013, 2012 and 2011.
Abbott enters into foreign currency forward exchange contracts
to manage currency exposures for foreign currency denominated
third-party trade payables and receivables, and for intercompany
loans and trade accounts payable where the receivable or payable
is denominated in a currency other than the functional currency
of the entity. For intercompany loans, the contracts require Abbott
to sell or buy foreign currencies, primarily European currencies
and Japanese yen, in exchange for primarily U.S. dollars and other
European currencies. For intercompany and trade payables and
receivables, the currency exposures are primarily the U.S. dollar,
European currencies and Japanese yen. At December 31, 2013, 2012
and 2011, Abbott held $13.8 billion, $18.2 billion and $15.7 billion,
respectively, of such foreign currency forward exchange contracts.
Contracts totaling $4.3 billion were transferred to AbbVie as part
of the separation on January 1, 2013.
Abbott has designated foreign denominated short-term debt as a
hedge of the net investment in a foreign subsidiary of approximately
$505 million, $615 million and $680 million as of December 31, 2013,
2012 and 2011, respectively. Accordingly, changes in the fair value
of this debt due to changes in exchange rates are recorded in
Accumulated other comprehensive income (loss), net of tax.
Abbott is a party to interest rate hedge contracts totaling $1.5 bil-
lion, $9.5 billion and $6.8 billion at December 31, 2013, 2012 and
2011, respectively, to manage its exposure to changes in the fair
value of fixed-rate debt. $8.0 billion of the contracts outstanding
at December 31, 2012 related to debt issued by AbbVie Inc. in the
fourth quarter of 2012 and were transferred to AbbVie as part of
the separation on January 1, 2013. These contracts are designated
as fair value hedges of the variability of the fair value of fixed-rate
debt due to changes in the long-term benchmark interest rates.
The effect of the hedge is to change a fixed-rate interest obligation
to a variable rate for that portion of the debt. Abbott records the
contracts at fair value and adjusts the carrying amount of the
fixed-rate debt by an offsetting amount. No hedge ineffectiveness
was recorded in income in 2013, 2012 and 2011 for these hedges.
Gross unrealized holding gains on available-for-sale equity
securities totaled $22 million, $51 million and $64 million at
December 31, 2013, 2012 and 2011, respectively.
The following table summarizes the amounts and location of
certain derivative financial instruments as of December 31:
Fair Value — Assets Fair Value — Liabilities
(in millions) 2013 2012 Balance Sheet Caption 2013 2012 Balance Sheet Caption
Interest rate swaps designated as fair value hedges $ 87 $185 Deferred income taxes $ — $ 80 Post‑employment
and other assets obligations and other
long‑term liabilities
Foreign currency forward exchange contracts — Other prepaid expenses
Hedging instruments 14 22 and receivables — 11 Other accrued liabilities
Others not designated as hedges 70 98 75 135
Debt designated as a hedge of net investment
in a foreign subsidiary — — n/a 505 615 Short‑term borrowings
$ 171 $305 $580 $841