Abbott Laboratories 2015 Annual Report Download - page 49

47
ABBOTT 2015 ANNUAL REPORT
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The aggregate intrinsic value of options outstanding and exercisable
at December31, 2015 was $475million and $447million, respec-
tively. The total intrinsic value of options exercised in 2015, 2014
and 2013 was $167million, $152million and $120million, respec-
tively. The total unrecognized compensation cost related to all
share-based compensation plans at December31, 2015 amounted
to approximately $169million, which is expected to be recognized
over the next three years.
Total non-cash stock compensation expense charged against
income from continuing operations in 2015, 2014 and 2013 for
share-based plans totaled approximately $291million, $239million
and $254million, respectively, and the tax benefit recognized was
approximately $98million, $79million and $82million, respec-
tively. Stock compensation cost capitalized as part of inventory is
not significant.
The fair value of an option granted in 2015, 2014 and 2013 was
$6.67, $6.39, and $5.77, respectively. The fair value of an option
grant was estimated using the Black-Scholes option-pricing
modelwith the following assumptions:
2015 2014 2013
Risk-free interest rate 1.8% 1.9% 1.1%
Average life of options (years) 6.0÷« 6.0÷« 6.0÷«
Volatility 17.0% 20.0% 20.0%
Dividend yield 2.0% 2.2% 1.6%
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
remaining 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 volatili-
ties 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) 2015 2014
5.125% Notes, due 2019 $÷«947 $÷«947
4.125% Notes, due 2020 597 597
2.00% Notes, due 2020 750 —
2.55% Notes, due 2022 750 —
2.95% Notes, due 2025 1,000 —
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 (a) 71 93
Total, net of current maturities 5,871 3,393
Current maturities of long-term debt 3 55
Total carrying amount $5,874 $3,448
(a) In 2015 and 2014, balances also include debt issuance costs in accordance with ASU
2015-03, which was adopted in 2015. Prior to the adoption of ASU 2015-03, debt issuance
costs were classified on the balance sheet as assets within Deferred Income Taxes and
Other Assets.
In March 2015, Abbott issued $2.5billion of long-term debt
consisting of $750million at 2.00% Senior Notes due March 15,
2020; $750million of 2.55% Senior Notes due March 15, 2022;
and $1.0billion of 2.95% Senior Notes due March 15, 2025.
Proceeds from this debt were used to pay down short-term
borrowings. Abbott also entered into interest rate swap contracts
totaling $2.5billion. These contracts have the eect of changing
Abbott’s obligation from a fixed interest rate to a variable interest
rate obligation.
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.
Principal payments required on long-term debt outstanding at
December 31, 2015 are $3million in 2016, $2million in 2017,
$1million in 2018, $0.9billion in 2019, $1.3billion in 2020 and
$3.5billion in 2021 and thereafter.
At December31, 2015, Abbott’s long-term debt rating was A+
by Standard& Poor’s Corporation and A2 by Moody’s Investors
Service. As a result of the pending acquisition of Alere, Abbott’s
credit ratings are under review and it is anticipated that the
ratings will be adjusted to reflect the increased borrowings that
will be incurred to finance the acquisition. Abbott has readily
available financial resources, including unused lines of credit of
$5.0billion which expire in 2019 and that support commercial
paper borrowing arrangements. Abbott’s weighted-average inter-
est rate on short-term borrowings was 0.2% at December31, 2015,
2014 and 2013.
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, with notional amounts totaling $2.4billion
at December 31, 2015, and $1.5billion at December31, 2014, 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. Accumulated gains and losses as of December31, 2015 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 2015, 2014
and 2013.
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, 2015, 2014
and 2013, Abbott held $14.0billion, $14.1billion and $13.8billion,
respectively, of such foreign currency forward exchange contracts.