Abbott Laboratories 2013 Annual Report Download - page 63

ABBOTT 2013 ANNUAL REPORT
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return on plan assets. The discount rates used to measure
liabilities were determined based on high-quality fixed income
securities that match the duration of the expected retiree benefits.
The health care cost trend rates represent Abbott’s expected
annual rates of change in the cost of health care benefits and is
a forward projection of health care costs as of the measurement
date. A difference between the assumed rates and the actual rates,
which will not be known for decades, can be significant in relation
to the obligations and the annual cost recorded for these pro-
grams. Low interest rates have significantly increased actuarial
losses for these plans. At December 31, 2013, pretax net actuarial
losses and prior service costs and (credits) recognized in
Accumulated other comprehensive income (loss) for Abbott’s
defined benefit plans and medical and dental plans were losses
of $1.8 billion and $82 million, respectively. Actuarial losses and
gains are amortized over the remaining service attribution periods
of the employees under the corridor method, in accordance with
the rules for accounting for post-employment benefits. Differences
between the expected long-term return on plan assets and the
actual annual return are amortized over a five-year period.
Note 12 to the consolidated financial statements describes the
impact of a one-percentage point change in the health care cost
trend rate; however, there can be no certainty that a change
would be limited to only one percentage point.
Valuation of Intangible Assets—Abbott has acquired and continues
to acquire significant intangible assets that Abbott records at fair
value. Transactions involving the purchase or sale of intangible
assets occur with some frequency between companies in the
health care field and valuations are usually based on a discounted
cash flow analysis. The discounted cash flow model requires
assumptions about the timing and amount of future net cash flows,
risk, the cost of capital, terminal values and market participants.
Each of these factors can significantly affect the value of the
intangible asset. Abbott engages independent valuation experts
who review Abbott’s critical assumptions and calculations
for acquisitions of significant intangibles. Abbott reviews defi-
nite-lived intangible assets for impairment each quarter using an
undiscounted net cash flows approach. If the undiscounted cash
flows of an intangible asset are less than the carrying value of an
intangible asset, the intangible asset is written down to its fair
value, which is usually the discounted cash flow amount. Where
cash flows cannot be identified for an individual asset, the review
is applied at the lowest group level for which cash flows are
identifiable. Goodwill and indefinite-lived intangible assets, which
relate to in-process research and development acquired in a
business combination, are reviewed for impairment annually
or when an event that could result in an impairment occurs.
At December 31, 2013, goodwill amounted to $9.8 billion and
intangibles amounted to $5.7 billion, and amortization expense
for intangible assets amounted to $791 million in 2013, $795 million
in 2012 and $884 million in 2011. There were no impairments of
goodwill in 2013, 2012 or 2011. In 2012 and 2011, Abbott recorded
impairment charges of $69 million and $125 million, respectively,
for certain research and development assets due to changes in the
projected development and regulatory timelines for the projects.
Litigation—Abbott accounts for litigation losses in accordance with
FASB Accounting Standards Codification No. 450, “Contingencies.”
Under ASC No. 450, loss contingency provisions are recorded for
probable losses at management’s best estimate of a loss, or when a
best estimate cannot be made, a minimum loss contingency amount
is recorded. These estimates are often initially developed substan-
tially earlier than the ultimate loss is known, and the estimates are
refined each accounting period as additional information becomes
known. Accordingly, Abbott is often initially unable to develop a
best estimate of loss, and therefore the minimum amount, which
could be zero, is recorded. As information becomes known, either
the minimum loss amount is increased, resulting in additional loss
provisions, or a best estimate can be made, also resulting in addi-
tional loss provisions. Occasionally, a best estimate amount is
changed to a lower amount when events result in an expectation
of a more favorable outcome than previously expected. Abbott
estimates the range of possible loss to be from approximately
$70 million to $90 million for its legal proceedings and environ-
mental exposures. Accruals of approximately $80 million have been
recorded at December 31, 2013 for these proceedings and exposures.
These accruals represent management’s best estimate of probable
loss, as defined by FASB ASC No. 450, “Contingencies.”
RESULTS OF OPERATIONS
SALES
The following table details the components of sales growth
by reportable segment for the last two years:
Total Components of % Change
% Change Price Volume Exchange
Total Net Sales
2013 vs. 2012 1.6 (0.8) 4.5 (2.1)
2012 vs. 2011 0.4 (0.4) 4.0 (3.2)
Total U.S.
2013 vs. 2012 (0.8) (1.0) 0.2 —
2012 vs. 2011 0.7 0.8 (0.1) —
Total International
2013 vs. 2012 2.7 (0.8) 6.5 (3.0)
2012 vs. 2011 0.3 (0.9) 5.7 (4.5)
Established Pharmaceutical Products Segment
2013 vs. 2012 (2.9) (0.4) 1.1 (3.6)
2012 vs. 2011 (4.4) (1.3) 3.4 (6.5)
Nutritional Products Segment
2013 vs. 2012 4.3 3.2 2.2 (1.1)
2012 vs. 2011 7.9 4.5 4.4 (1.0)
Diagnostic Products Segment
2013 vs. 2012 5.9 (2.5) 10.8 (2.4)
2012 vs. 2011 4.0 (1.4) 8.7 (3.3)
Vascular Products Segment
2013 vs. 2012 (1.9) (6.2) 6.2 (1.9)
2012 vs. 2011 (7.9) (5.2) (0.4) (2.3)
The increases in Total Net Sales in 2013 and 2012 reflect unit
growth, partially offset by the impact of unfavorable foreign
exchange. The price declines related to Vascular Products sales
in 2013 and 2012 primarily reflect pricing pressure on drug
eluting stents and other coronary products as a result of market
competition in major markets.
FINANCIAL REVIEW