Financial Review: Part 2
Income Taxes – Abbott operates in numerous countries where its income tax returns are subject to audits and adjustments. Because Abbott operates globally, the nature of the audit items are often very complex, and the objectives of the government auditors can result in a tax on the same income in more than one country. Abbott employs internal and external tax professionals to minimize audit adjustment amounts where possible. In accordance with the accounting rules relating to the measurement of tax contingencies, in order to recognize an uncertain tax benefit, the taxpayer must be more likely than not of sustaining the position, and the measurement of the benefit is calculated as the largest amount that is more than 50 percent likely to be realized upon resolution of the benefit. Application of these rules requires a significant amount of judgment. In the U.S., Abbott’s federal income tax returns through 2008 are settled except for one item, and the income tax returns for years after 2008 are open. Abbott does not record deferred income taxes on earnings reinvested indefinitely in foreign subsidiaries.
Pension and Post-Employment Benefits – Abbott offers pension benefits and post-employment health care to many of its employees. Abbott engages outside actuaries to assist in the determination of the obligations and costs under these programs. Abbott must develop long-term assumptions, the most significant of which are the health care cost trend rates, discount rates and the expected 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 programs. Low asset returns due to poor market conditions and low interest rates have significantly increased actuarial losses for these plans. At December 31, 2011, 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 $3.8 billion and $237 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 4 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 definite-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, 2011, goodwill and intangibles amounted to $15.7 billion and $10.0 billion, respectively, and amortization expense for intangible assets amounted to $1.6 billion in 2011. There were no impairments of goodwill in 2011, 2010 or 2009. In 2011, Abbott recorded impairment charges of $174 million 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 substantially 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 additional 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 $1.59 billion to $1.63 billion for its legal proceedings and environmental exposures. Reserves of approximately $1.6 billion have been recorded at December 31, 2011 for these proceedings and exposures. These reserves 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 three years:
Total % Change |
Components of Change % |
|||
Price |
Volume |
Exchange |
||
Total Net Sales |
||||
2011 vs. 2010 |
10.5 |
1.2 |
6.5 |
2.8 |
2010 vs. 2009 |
14.3 |
(0.1) |
13.2 |
1.2 |
2009 vs. 2008 |
4.2 |
(0.1) |
8.3 |
(4.0) |
Total U.S. |
||||
2011 vs. 2010 |
5.4 |
4.4 |
1.0 |
— |
2010 vs. 2009 |
6.8 |
0.7 |
6.1 |
— |
2009 vs. 2008 |
0.4 |
(0.3) |
0.7 |
— |
Total International |
||||
2011 vs. 2010 |
14.3 |
(1.2) |
10.6 |
4.9 |
2010 vs. 2009 |
20.7 |
(0.8) |
19.3 |
2.2 |
2009 vs. 2008 |
7.7 |
0.2 |
15.1 |
(7.6) |
Proprietary Pharmaceutical Products Segment |
||||
2011 vs. 2010 |
11.0 |
3.5 |
5.2 |
2.3 |
2010 vs. 2009 |
13.2 |
0.3 |
12.3 |
0.6 |
2009 vs. 2008 |
0.2 |
(0.2) |
4.0 |
(3.6) |
Established Pharmaceutical Products Segment |
||||
2011 vs. 2010 |
19.8 |
(1.7) |
17.2 |
4.3 |
2010 vs. 2009 |
53.7 |
(0.3) |
51.1 |
2.9 |
2009 vs. 2008 |
(7.6) |
0.4 |
(1.1) |
(6.9) |
Nutritional Products Segment |
||||
2011 vs. 2010 |
8.6 |
3.0 |
3.6 |
2.0 |
2010 vs. 2009 |
4.7 |
1.7 |
1.2 |
1.8 |
2009 vs. 2008 |
7.3 |
1.5 |
8.6 |
(2.8) |
Diagnostic Products Segment |
||||
2011 vs. 2010 |
8.8 |
(1.1) |
6.5 |
3.4 |
2010 vs. 2009 |
6.0 |
0.1 |
4.3 |
1.6 |
2009 vs. 2008 |
0.1 |
1.4 |
3.7 |
(5.0) |
Vascular Products Segment |
||||
2011 vs. 2010 |
4.4 |
(4.3) |
5.5 |
3.2 |
2010 vs. 2009 |
18.6 |
(4.7) |
22.3 |
1.0 |
2009 vs. 2008 |
20.1 |
(2.9) |
26.0 |
(3.0) |
