Financial Instruments and Risk Management
Market Price Sensitive Investments
Abbott holds available-for-sale equity securities from strategic technology acquisitions. The market value of these investments was approximately $93 million and $75 million as of December 31, 2011 and 2010, respectively. Abbott monitors these investments for other than temporary declines in market value, and charges impairment losses to income when an other than temporary decline in value occurs. A hypothetical 20 percent decrease in the share prices of these investments would decrease their fair value at December 31, 2011 by approximately $18 million. (A 20 percent decrease is believed to be a reasonably possible near-term change in share prices.)
Non-Publicly Traded Equity Securities
Abbott holds equity securities from strategic technology acquisitions that are not traded on public stock exchanges. The carrying value of these investments was approximately $224 million and $165 million as of December 31, 2011 and 2010, respectively. One equity investment is recorded at $124 million with no other individual investment in excess of $18 million. Abbott monitors these investments for other than temporary declines in market value, and charges impairment losses to income when an other than temporary decline in estimated value occurs.
Interest Rate Sensitive Financial Instruments
At December 31, 2011 and 2010, Abbott had interest rate hedge contracts totaling $6.8 billion and $7.3 billion, respectively, to manage its exposure to changes in the fair value of debt. The effect of these hedges is to change the fixed interest rate to a variable rate. Abbott does not use derivative financial instruments, such as interest rate swaps, to manage its exposure to changes in interest rates for its investment securities. At December 31, 2011, Abbott had $450 million of domestic commercial paper outstanding with an average annual interest rate of 0.07% with an average remaining life of 12 days. The fair value of long-term debt at December 31, 2011 and 2010 amounted to $15.1 billion and $15.7 billion, respectively (average interest rates of 5.2%) with maturities through 2040. At December 31, 2011 and 2010, the fair value of current and long-term investment securities amounted to approximately $1.7 billion and $2.1 billion, respectively. A hypothetical 100-basis point change in the interest rates would not have a material effect on cash flows, income or market values. (A 100-basis point change is believed to be a reasonably possible near-term change in rates.)
Foreign Currency Sensitive Financial Instruments
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 are designated as cash flow hedges of the variability of the cash flows due to changes in foreign currency exchange rates and are marked-to-market with the resulting gains or losses reflected in Accumulated other comprehensive income (loss). Gains or losses will be included in Cost of products sold at the time the products are sold, generally within the next twelve months. At December 31, 2011 and 2010, Abbott held $1.6 billion and $1.3 billion, respectively, of such contracts, which all mature in the following calendar year.
Abbott enters into foreign currency forward exchange contracts to manage its exposure to foreign currency denominated intercompany loans and trade payables and third-party trade payables and receivables. The contracts are marked-to-market, and resulting gains or losses are reflected in income and are generally offset by losses or gains on the foreign currency exposure being managed. At December 31, 2011 and 2010, Abbott held $15.7 billion and $10.8 billion, respectively, of such contracts, which mature in the next twelve months.
Abbott has designated foreign denominated short-term debt of approximately $680 million and approximately $650 million as of December 31, 2011 and 2010, respectively, as a hedge of the net investment in a foreign subsidiary. 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.
The following table reflects the total foreign currency forward contracts outstanding at December 31, 2011 and 2010:
2011 |
2010 |
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(dollars in millions) |
Contract Amount |
Weighted Average Exchange Rate |
Fair and Carrying Value Receivable/ (Payable) |
Contract Amount |
Weighted Average Exchange Rate |
Fair and Carrying Value Receivable/ (Payable) |
Receive primarily U.S. Dollars in exchange for the following currencies: |
||||||
Euro |
$10,526 |
1.329 |
$102 |
$5,803 |
1.347 |
$16 |
British Pound |
1,501 |
1.571 |
3 |
1,422 |
1.581 |
2 |
Japanese Yen |
2,458 |
80.3 |
(3) |
2,256 |
82.7 |
(2) |
Canadian Dollar |
280 |
1.026 |
(2) |
538 |
1.021 |
4 |
All other currencies |
2,544 |
N/A |
(1) |
2,090 |
N/A |
(25) |
Total |
$17,309 |
$99 |
$12,109 |
$(5) |
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