Issue link: http://catalog.e-digitaleditions.com/i/114936
reached with the United States Internal Revenue Service (IRS). In 2011 we reached a favorable settlement regarding an IRS proposed adjustment to our previously filed 2003 through 2007 income tax returns related to the income tax positions we had taken for our Irish cost sharing arrangements. We also reached a settlement with the IRS with respect to the allocation of income with a wholly owned subsidiary operating in Puerto Rico for the years 2006 through 2009. The higher interest expense in 2012 due to the effect of the 2011 tax settlements was partially offset by higher interest income on our investments, due to higher cash and cash equivalents and marketable securities balances compared to 2011. Income Taxes Our effective income tax rate on earnings was 23.9%, 20.2% and 26.4% in 2012, 2011 and 2010, respectively. The effective income tax rate for 2012 includes the net impact of effective settlement of all tax matters through 2004 relating to two German subsidiaries, and adjustment of the estimate of foreign tax credits to the amount shown on the tax return as filed. The effective income tax rate for 2011 includes the net impact of the settlements with the IRS as described above. The effective income tax rate for 2010 includes the impact of a property, plant and equipment impairment charge, the gain on sale of a manufacturing facility and the favorable income tax expense adjustment associated with the repatriation of foreign earnings to the United States completed in 2009. The American Taxpayer Relief Act of 2012 (the Act) was signed on January 2, 2013. The Act provided numerous tax provisions for corporations including an extension of the research tax credit and an extension of certain provisions for companies with significant international operations. These provisions originally expired at December 31, 2011 but were retroactively extended through December 31, 2013. In 2013 we will record tax benefits of approximately $13 related to the 2012 research tax credit and other provisions of the Act. Net Earnings Net earnings in 2012 decreased 3.5% from 2011 to $1,298. Basic net earnings per share in 2012 decreased 2.0% from 2011 to $3.41, and diluted net earnings per share in 2012 decreased 1.7% from 2011 to $3.39. Net earnings in 2011 increased 5.7% from 2010 to $1,345. Basic net earnings per share in 2011 increased 8.4% from 2010 to $3.48, and diluted net earnings per share in 2011 increased 8.2% from 2010 to $3.45. Reported net earnings includes the benefits from settlements and other adjustments related to uncertain tax positions, restructuring and related charges and acquisition and integration related charges, including transaction costs, integration related costs and additional cost of sales for inventory sold in the year that was "stepped up" to fair value. In addition, 2012 net earnings includes a charge of $133 (net of taxes) related to the previously disclosed voluntary recall of our Rejuvenate and ABG II modular-neck hip stems, and $33 offered to the United States Department of Justice to resolve the matter related to the sales and marketing of our OtisKnee device for which we have recorded a corresponding non-tax deductible charge. Excluding the impact of these items, adjusted net earnings in 2012 increased 7.7% to $1,560 after increasing 9.0% in 2011. Adjusted diluted net earnings per share in 2012 increased 9.4% to $4.07 after increasing 11.7% in 2011. The following reconciles the non-GAAP financial measures adjusted net earnings and adjusted diluted net earnings per share with the most directly comparable GAAP financial measures, reported net earnings and diluted net earnings per share: 2012 Reported net earnings Acquisition and integration-related charges, net of tax: Inventory stepped up to fair value Acquisition and integration-related charges Restructuring and related charges Uncertain income tax position adjustments OtisKnee matter Rejuvenate and ABG II recall Gain on sale of property, plant and equipment Income taxes on repatriation of foreign earnings Impairment of property, plant and equipment Adjusted net earnings Diluted net earnings per share of common stock: Reported diluted net earnings per share Acquisition and integration-related charges, net of tax: Inventory stepped up to fair value Acquisition and integration-related charges Restructuring and related charges Uncertain income tax position adjustments OtisKnee matter Rejuvenate and ABG II recall Gain on sale of property, plant and equipment Income taxes on repatriation of foreign earnings Impairment of property, plant and equipment Adjusted diluted net earnings per share Weighted-average diluted shares outstanding 14 2011 $ 1,298 2010 $ 1,345 $ 13 24 59 ��� 33 133 ��� ��� ��� 1,560 $ 97 45 60 (99) ��� ��� ��� ��� ��� 1,448 $ $ 3.39 $ $ 0.03 0.06 0.15 ��� 0.09 0.35 ��� ��� ��� 4.07 383.0 $ 3.45 $ $ 0.25 0.12 0.16 (0.26) ��� ��� ��� ��� ��� 3.72 $ 389.5 1,273 ��� ��� ��� ��� ��� ��� (13) (7) 76 1,329 3.19 ��� ��� ��� ��� ��� ��� (0.03) (0.02) 0.19 3.33 399.5 Dollar amounts in millions except per share amounts or as otherwise specified