Abbott Laboratories 2014 Annual Report Download - page 69

FINANCIAL REVIEW
67
ABBOTT 2014 ANNUAL REPORT
Interest income increased in 2014 due to a higher return earned
on short-term investments during the year, while in 2013 interest
income increased as a result of a higher level of investments.
OTHER (INCOME) EXPENSE, NET
Other (income) expense, net, for 2014 includes charges associated
with the impairment of certain equity investments partially oset
by gains on sales of investments; 2013 includes gains on sales of
investments; and 2012 includes approximately $40million of
income from the resolution of a contractual agreement.
NET LOSS ON EXTINGUISHMENT OF DEBT
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 extinguished $7.7billion of long-term debt and
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 from continuing operations were
31.6percent in 2014, 2.6percent in 2013 and 207.7percent in 2012.
In 2014, taxes on earnings from continuing operations include
$440million of tax expense associated with a one-time repatria-
tion of 2014 non-U.S. earnings partially oset by $125million of
tax benefits related to the resolution of various tax positions and
the adjustment of tax uncertainties from prior years. 2013 taxes
on earnings from continuing operations include $230million of
tax benefit related to the resolution of various tax positions from
previous years. In addition, as a result of the American Taxpayer
Relief Act of 2012 signed into law in January 2013, Abbott recorded
a tax benefit to taxes on continuing operations of approximately
$103 million in 2013 for the retroactive 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. Taxes on earnings
from continuing operations in 2012 reflect the $472million eect
of the tax rate applied to Abbott’s net debt extinguishment loss,
as well as the recognition of $212million of tax benefits as a result
of the favorable resolution of various tax positions pertaining to a
prior year. Exclusive of these discrete items, tax expense in 2013
and 2012 were favorably impacted by lower tax rates and tax
exemptions on foreign income primarily derived from operations
in Puerto Rico, Switzerland, Ireland, the Netherlands, and
Singapore. Abbott benefits from a combination of favorable
statutory tax rules, tax rulings, grants, and exemptions in these
tax jurisdictions. See Note14 to the consolidated financial state-
ments for a full reconciliation of the eective tax rate to the
U.S. federal statutory rate.
Abbott has accrued U.S. taxes on approximately $2.2billion of
2014 earnings generated outside the U.S. in connection with a
repatriation of these earnings. In addition to the $440million of
tax expense discussed above, the repatriation resulted in $82mil-
lion of additional tax expense in Abbott’s 2014 income from
discontinued operations. Abbott expects to accelerate the utiliza-
tion of deferred tax assets and therefore cash taxes due in the
U.S. on this repatriation are not expected to be material.
Approximately $20million is recognized in Cost of products sold,
$53million is recognized in Research and development and approxi-
mately $91million is recognized in Selling, general and administrative
expense. Additional charges of approximately $39million in 2014
were also recorded primarily for accelerated depreciation.
In 2014 and 2013, Abbott management approved plans to reduce
costs and improve eciencies across various functional areas as
well as a plan to streamline certain manufacturing operations in
order to reduce costs and improve eciencies in Abbott’s estab-
lished pharmaceuticals business. In addition, in 2012, Abbott
management approved plans to streamline various commercial
operations in order to reduce costs and improve eciencies in
Abbott’s core diagnostics, established pharmaceutical and nutri-
tionals businesses. Abbott recorded employee related severance
charges of approximately $125million in 2014, $78million in
2013 and $167million in 2012. Approximately $7million in 2014,
$14million in 2013 and $48million in 2012 are recognized in Cost
of products sold, $6million is recognized in Research and develop-
ment in 2014, and approximately $112million in 2014, $32million
in 2013 and $48million in 2012 recognized as Selling, general and
administrative expense. The remaining charges of $32million in
2013 and $71million in 2012 are related to Abbott’s developed
market established pharmaceutical business and are being recog-
nized in the results of discontinued operations. Additional charges
of approximately $4million in 2013 and $22million in 2012 were
also recorded primarily for accelerated depreciation.
In 2013 and prior years, Abbott management approved plans to
realign its worldwide pharmaceutical and vascular manufacturing
operations and selected domestic and international commercial
and research and development operations in order to reduce costs.
In 2013, Abbott recorded employee severance charges of approxi-
mately $11million. Approximately $11million in 2013 is classified
as Cost of products sold. An additional $41million and $110mil-
lion were recorded in 2013 and 2012, respectively, relating to these
restructurings, primarily for accelerated depreciation.
In 2012 and 2010, Abbott management approved restructuring
plans primarily related to the acquisition of Solvay’s pharmaceuti-
cals business. These plans streamline operations, improve
eciencies and reduce costs in certain Solvay sites and functions
as well as in certain Abbott and Solvay commercial organizations
in various countries. In 2012, Abbott recorded a charge of approxi-
mately $150million for employee severance and contractual
obligations, primarily related to the exit from a research and
development facility. These charges are related to businesses
transferred to AbbVie and are being recognized in the results of
discontinued operations. The accrued restructuring reserves of
$115million at December31, 2012 related to these actions were
transferred to AbbVie on January1, 2013 as part of the separation.
As such, there are no remaining accruals being reported in
Abbott’s balance sheet as of December31, 2013.
INTEREST EXPENSE AND INTEREST (INCOME)
In 2014, interest expense increased due to a higher level of
short-term borrowings during the year. In 2013, interest expense
decreased due to a lower level of borrowings, which resulted
from the transfer of approximately $14.6billion of debt to AbbVie
as part of the separation. In 2012, interest expense included bridge
facility fees related to the separation of AbbVie from Abbott.