Abbott Laboratories 2014 Annual Report Download - page 49

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ABBOTT 2014 ANNUAL REPORT
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 11—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 $1.5billion at December31, 2014,
and $137million at December31, 2013, 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, 2014 will be included in Cost of products sold at
the time the products are sold, generally through the next twelve
to eighteen months. The amount of hedge ineectiveness was
not significant in 2014, 2013 and 2012.
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, 2014, 2013
and 2012, Abbott held $14.1billion, $13.8billion and $18.2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 approxi‑
mately $445million, $505million and $615million as of
December31, 2014, 2013 and 2012, 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 at December31, 2014 and December31, 2013, and $9.5billion
at December31, 2012, 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 eect 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 osetting amount. No hedge ineectiveness
was recorded in income in 2014, 2013 and 2012 for these hedges.
Gross unrealized holding gains (losses) on available-for-sale
equity securities totaled $3million, $22million and $51million
at December31, 2014, 2013 and 2012, respectively.
The fair value of an option granted in 2014, 2013 and 2012 was
$6.39, $5.77, and $6.80, respectively. The fair value of an option
grant was estimated using the Black-Scholes option-pricing model
with the following assumptions:
2014 2013 2012
Risk-free interest rate 1.9% 1.1% 1.2%
Average life of options (years) 6.0÷« 6.0÷« 6.0÷«
Volatility 20.0% 20.0% 21.0%
Dividend yield 2.2% 1.6% 3.6%
The risk-free interest rate is based on the rates available at the time
of the grant for zero-coupon U.S. government issues with a remain-
ing term equal to the option’s expected life. The average life of an
option is based on both historical and projected exercise and lapsing
data. Expected volatility is based on implied volatilities from traded
options on Abbott’s stock and historical volatility of Abbott’s stock
over the expected life of the option. Dividend yield is based on the
option’s exercise price and annual dividend rate at the time of grant.
NOTE 10—DEBT AND LINES OF CREDIT
The following is a summary of long-term debt at December31:
(inmillions) 2014 2013
5.125% Notes, due 2019 $÷«947 $÷«947
4.125% Notes, due 2020 597 597
6.15% Notes, due 2037 547 547
6.0% Notes, due 2039 515 515
5.3% Notes, due 2040 694 694
Other, including fair value adjustments
relating to interest rate hedge contracts
designated as fair value hedges 108 88
Total, net of current maturities 3,408 3,388
Current maturities of long-term debt 55 9
Total carrying amount $3,463 $3,397
In 2014, Abbott extinguished approximately $500million of long-
term debt assumed as part of the CFR Pharmaceuticals acquisition
and incurred a cost of $18.3million to extinguish this debt. 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, 2014 are $55million in 2015, $8million in 2016,
$11million in 2017, $2million in 2018, $1.0billion in 2019 and
$2.4billion in 2020 and thereafter.
At December31, 2014, 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 2019. Abbott’s weighted-
average interest rate on short-term borrowings was 0.2% at
December31, 2014 and 2013 and 0.4% at December31, 2012.