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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2000 Commission file number 1-1225
AMERICAN HOME PRODUCTS CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 13-2526821
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
Five Giralda Farms, Madison, N.J. 07940
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (973) 660-5000
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period
that the registrant was required to file such reports), and (2) has
been subject to such filing requirements for the past 90 days.
Yes X No
The number of shares of Common Stock outstanding as of the close of business on
April 28, 2000:
Number of
Class Shares Outstanding
Common Stock, $0.33-1/3 par value 1,304,197,776
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AMERICAN HOME PRODUCTS CORPORATION AND SUBSIDIARIES
INDEX
Page No.
Part I - Financial Information 2
Item 1. Financial Statements:
Consolidated Condensed Balance Sheets -
March 31, 2000 and December 31, 1999 3
Consolidated Condensed Statements of Income -
Three Months Ended March 31, 2000 and 1999 4
Consolidated Condensed Statements of Changes in Stockholders'
Equity - Three Months Ended March 31, 2000 and 1999 5
Consolidated Condensed Statements of Cash Flows -
Three Months Ended March 31, 2000 and 1999 6
Notes to Consolidated Condensed Financial Statements 7-11
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 12-18
Part II - Other Information 19
Item 1. Legal Proceedings 19
Item 6. Exhibits and Reports on Form 8-K 20
Signature 21
Exhibit Index EX-1
1
Part I - Financial Information
AMERICAN HOME PRODUCTS CORPORATION AND SUBSIDIARIES
The consolidated condensed financial statements included herein have been
prepared by American Home Products Corporation (the "Company"), without audit,
pursuant to the rules and regulations of the Securities and Exchange Commission.
Certain information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting principles
have been condensed or omitted pursuant to such rules and regulations; however,
the Company believes that the disclosures are adequate to make the information
presented not misleading. In the opinion of management, the financial
statements include all adjustments necessary to present fairly the financial
position of the Company as of March 31, 2000 and December 31, 1999, and the
results of its operations, cash flows and changes in stockholders' equity for
the three months ended March 31, 2000 and 1999. It is suggested that these
financial statements and management's discussion and analysis of financial
condition and results of operations be read in conjunction with the financial
statements and the notes thereto included in the Company's 1999 Annual Report
on Form 10-K.
2
AMERICAN HOME PRODUCTS CORPORATION AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
(In Thousands Except Per Share Amounts)
March 31, December 31,
2000 1999
------------ ------------
ASSETS
Cash and cash equivalents $2,143,239 $1,892,715
Marketable securities 561,402 520,587
Accounts receivable less allowances 2,245,381 2,389,863
Inventories:
Finished goods 781,227 753,831
Work in progress 522,599 471,327
Materials and supplies 410,953 382,802
------------ ------------
1,714,779 1,607,960
Other current assets including deferred
taxes 1,885,091 1,781,307
Net Assets - Discontinued business held
for sale 4,257,000 4,192,346
------------ ------------
Total Current Assets 12,806,892 12,384,778
Property, plant and equipment 6,681,722 6,392,948
Less accumulated depreciation 2,380,413 2,274,771
------------ ------------
4,301,309 4,118,177
Goodwill and other intangibles, net of
accumulated amortization 4,783,583 4,823,309
Other assets including deferred taxes 1,588,641 1,797,492
------------ ------------
Total Assets $23,480,425 $23,123,756
============ ============
LIABILITIES
Loans payable $859,840 $1,880,816
Trade accounts payable 611,848 562,679
Accrued expenses 4,141,528 3,809,525
Accrued federal and foreign taxes 1,511,585 227,363
------------ ------------
Total Current Liabilities 7,124,801 6,480,383
Long-term debt 3,634,109 3,606,423
Other noncurrent liabilities 5,587,370 5,925,313
Postretirement benefit obligations other
than pensions 881,760 896,890
STOCKHOLDERS' EQUITY
$2 convertible preferred stock, par value
$2.50 per share 59 61
Common stock, par value $0.33-1/3 per
share 434,518 434,639
Additional paid-in capital 3,436,442 3,392,705
Retained earnings 2,860,777 3,000,827
Accumulated other comprehensive loss (479,411) (613,485)
------------ ------------
Total Stockholders' Equity 6,252,385 6,214,747
------------ ------------
Total Liabilities and Stockholders'
Equity $23,480,425 $23,123,756
============ ============
The accompanying notes are an integral part of these consolidated condensed
balance sheets.
3
AMERICAN HOME PRODUCTS CORPORATION AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
(In Thousands Except Per Share Amounts)
Three Months
Ended March 31,
2000 1999
----------- -----------
Net Sales $3,336,495 $2,858,049
----------- -----------
Cost of goods sold 826,573 700,306
Selling, general and administrative expenses 1,213,262 1,061,202
Research and development expenses 442,925 369,967
Interest expense, net 43,141 56,331
Other income, net (52,401) (80,055)
Termination fee, net of related expenses (1,709,380) -
---------- ----------
Income from continuing operations before
federal and foreign taxes 2,572,375 750,298
Provision for federal and foreign taxes 826,366 212,158
---------- ----------
Income from continuing operations 1,746,009 538,140
---------- ----------
Discontinued Operations:
Income from operations of discontinued
agricultural products business (net of
federal and foreign taxes of $57,289
and $47,421 for 2000 and 1999) 103,346 116,778
Loss on disposal of agricultural products
business (including federal and foreign tax
charges of $855,248) (1,572,993) -
---------- ----------
Income (loss) from discontinued operations (1,469,647) 116,778
---------- ----------
Net income $276,362 $654,918
========== ==========
Basic Earnings Per Share from Continuing Operations $1.34 $0.41
Basic Earnings (Loss) Per Share from Discontinued
Operations (1.13) 0.09
---------- ----------
Basic Earnings Per Share $0.21 $0.50
========== ==========
Diluted Earnings Per Share from Continuing
Operations $1.32 $0.40
Diluted Earnings (Loss) Per Share from
Discontinued Operations (1.11) 0.09
---------- ----------
Diluted Earnings Per Share $0.21 $0.49
========== ==========
Dividends per share of common stock $0.230 $0.225
========== ==========
The accompanying notes are an integral part of these consolidated condensed
financial statements.
4
AMERICAN HOME PRODUCTS CORPORATION AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(In Thousands)
Three Months Ended March 31, 2000:
$2 Accumulated
Convertible Additional Other Total
Preferred Common Paid-in Retained Comprehensive Stockholders'
Stock Stock Capital Earnings Loss Equity
------------ ------------ ------------ ------------ ------------ ------------
Balance at January 1, 2000 $61 $434,639 $3,392,705 $3,000,827 ($613,485) $6,214,747
Net income 276,362 276,362
Currency translation
adjustments 119,388 119,388
Unrealized gain on marketable
securities 14,686 14,686
------------
Comprehensive income 410,436
------------
Cash dividends declared (300,084) (300,084)
Treasury stock acquired (817) (5,310) (114,232) (120,359)
Common stock issued 620 40,781 41,401
Conversion of preferred stock
and other exchanges (2) 76 8,266 (2,096) 6,244
------------ ------------ ------------ ------------ ------------ ------------
Balance at March 31, 2000 $59 $434,518 $3,436,442 $2,860,777 ($479,411) $6,252,385
============ ============ ============ ============ ============ ============
Three Months Ended March 31, 1999:
$2 Accumulated
Convertible Additional Other Total
Preferred Common Paid-in Retained Comprehensive Stockholders'
Stock Stock Capital Earnings Loss Equity
------------ ------------ ------------ ------------ ------------ ------------
Balance at January 1, 1999 $64 $437,466 $3,072,874 $6,432,729 ($328,337) $9,614,796
Net income 654,918 654,918
Currency translation
adjustments (222,887) (222,887)
Unrealized loss on marketable
securities (52) (52)
------------
Comprehensive income 431,979
------------
Cash dividends declared (294,943) (294,943)
Treasury stock acquired (2,511) (32,492) (399,688) (434,691)
Common stock issued 1,816 116,485 118,301
Conversion of preferred stock
and other exchanges (1) 103 18,655 (4,296) 14,461
------------ ------------ ------------ ------------ ------------ ------------
Balance at March 31, 1999 $63 $436,874 $3,175,522 $6,388,720 ($551,276) $9,449,903
============ ============ ============ ============ ============ ============
The accompanying notes are an integral part of these consolidated condensed
financial statements.
5
AMERICAN HOME PRODUCTS CORPORATION AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(In Thousands)
Three Months Ended
March 31,
Operating Activities 2000 1999
------------ -----------
Income from continuing operations $1,746,009 $538,140
Adjustments to reconcile income from
continuing operations to net cash
provided from operating activities:
Gains on sales of other assets (48,941) (67,746)
Depreciation and amortization 142,643 137,766
Deferred income taxes 184,613 34,145
Changes in working capital, net 717,664 22,827
Diet drug litigation payments (639,639) -
Other items, net 61,779 44,196
------------ -----------
Net cash provided from continuing operations 2,164,128 709,328
Net cash used for discontinued operations (260,680) (243,853)
------------ -----------
Net cash provided from operating activities 1,903,448 465,475
------------ -----------
Investing Activities
Purchases of property, plant and equipment (256,462) (154,489)
Proceeds from sales of other assets 65,515 132,604
Proceeds from sales and maturities of
marketable securities 236,614 66,367
Purchases of marketable securities (278,632) (78,116)
------------ -----------
Net cash used for investing activities (232,965) (33,634)
------------ -----------
Financing Activities
Net proceeds from/(repayments of) debt (1,036,295) 348,086
Dividends paid (300,084) (294,943)
Exercises of stock options 41,401 118,301
Purchases of treasury stock (120,359) (434,691)
------------ -----------
Net cash used for financing activities (1,415,337) (263,247)
------------ -----------
Effects of exchange rates on cash balances (4,622) (20,304)
------------ -----------
Increase in cash and cash equivalents 250,524 148,290
Cash and cash equivalents, beginning of
period 1,892,715 1,182,319
------------ -----------
Cash and cash equivalents, end of period $2,143,239 $1,330,609
============ ===========
Supplemental Information
Interest payments $161,581 $108,914
Income tax payments, net of refunds 133,226 193,198
The accompanying notes are an integral part of these consolidated condensed
financial statements.
6
AMERICAN HOME PRODUCTS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
Note 1. Discontinued Operations
In March 2000, the Company announced that it signed a definitive
agreement with BASF Aktiengesellschaft (BASF) for the sale of the
agricultural products business. The agricultural products business
manufactures, distributes and sells crop protection and pest control
products, such as herbicides, insecticides and fungicides. Under the
terms of the agreement, which is subject to certain customary
conditions, including regulatory approval, BASF will pay the Company
$3.8 billion in cash and will assume certain debt. As a result, the
Company recorded an estimated after-tax loss on the sale of this
business of $1,572,993,000 or $1.19 per share-diluted and has
reflected this business as a discontinued operation in the 2000 first
quarter. The loss on the sale included anticipated closing costs,
which were more than offset by estimated after-tax operating income of
the agricultural products business of $86,035,000 from April 1, 2000
through June 30, 2000, the anticipated disposal period. The loss on
the sale was due primarily to a difference in the basis of the net
assets being sold for financial reporting purposes compared to that
for tax purposes. This difference related, for the most part, to
goodwill which is not recognized for tax purposes in the proposed
sale. As a result, the transaction will generate a taxable gain,
requiring the recording of a tax provision, in addition to requiring
a write-off of the net assets in excess of the selling price. The
Consolidated Condensed Financial Statements at December 31, 1999 and
March 31, 1999 have been restated to reflect the agricultural
products business as a discontinued operation. The difference between
the net assets - discontinued business held for sale at March 31,
2000 and the $3.8 billion in anticipated proceeds from the sale
represents seasonal assets, primarily accounts receivable, that is
anticipated to convert to cash prior to the closing of this
transaction. Operating results of discontinued operations were as
follows:
Three Months
(In thousands except per share amounts) Ended March 31,
---------------------
2000 1999
---------- ----------
Net Sales $546,790 $584,303
---------- ----------
Income before federal and foreign taxes 160,635 164,199
Provisions for federal and foreign taxes 57,289 47,421
---------- ----------
Income from operations of discontinued
agricultural products business 103,346 116,778
Loss on disposal of agricultural products
business (including federal and
foreign tax charges of $855,248) (1,572,993) -
---------- ----------
Income (Loss) from Discontinued
Operations ($1,469,647) $116,778
========== ==========
Diluted Earnings (Loss) per Share
from Discontinued Operations ($1.11) $0.09
========== ==========
7
AMERICAN HOME PRODUCTS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
Note 2. Warner-Lambert Termination Fee
During the 2000 first quarter, the Company and Warner-Lambert Company
terminated their merger agreement. The Company recorded income of
$1,709,380,000 ($1,111,097,000 after-tax or $0.84 per share-diluted)
in income from continuing operations resulting from the receipt of a
$1.8 billion termination fee provided for under the merger agreement
offset, in part, by certain related expenses.
Note 3. Contingencies and Litigation Settlement
The Company is involved in various legal proceedings, including
product liability and environmental matters of a nature considered
normal to its business. It is the Company's policy to accrue for
amounts related to these legal matters if it is probable that a
liability has been incurred and an amount is reasonably estimable.
On April 13, 2000, the Company announced that it will proceed with
the comprehensive, nationwide diet drug settlement to resolve
litigation brought against the Company regarding the use of REDUX
(dexfenfluramine) or PONDIMIN (fenfluramine). The comprehensive,
nationwide settlement is subject to judicial approval (and resolution
of appeals, if any) following a fairness hearing in the U.S. District
Court for the Eastern District of Pennsylvania, which took place on May
2-11, 2000. Of the estimated 5.8 million diet drug users,
approximately 200,000 individuals had registered for the settlement and
approximately 45,000 opted out during the four-month initial opt-out
period ended March 30, 2000. A majority of those who registered have
elected the settlement's Accelerated Implementation Option, which
provides for prompt benefits and resolves the claims of those class
members.
As of March 31, 2000, there was $3,992,780,000 of the REDUX and
PONDIMIN litigation accrual remaining, which reflected individual
settlement payments, legal fees and other items in the 2000 first
quarter totaling $639,639,000. The Company believes that this accrual
is adequate based upon, among other things, the assumption that the
comprehensive, nationwide settlement will receive final judicial
approval. However, the Company will continue to review and analyze
all diet drug matters, including the number and nature of
registrations within the nationwide settlement, opt-out claims and
other matters.
In the opinion of the Company, although the outcome of any legal
proceedings cannot be predicted with certainty, the ultimate
liability of the Company in connection with its legal proceedings
will not have a material adverse effect on the Company's financial
position but could be material to the results of operations in any
one accounting period.
8
AMERICAN HOME PRODUCTS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
Note 4. Restructuring Programs
1999 Agricultural Products Restructuring Charge and Asset Impairments
During the 1999 third quarter, the Company recorded a charge of
$113,000,000 to provide for the restructuring of the Company's
agricultural products business. The restructuring will result in the
elimination of approximately 700 positions worldwide. Since the end
of 1999, the Company discontinued its agricultural products business
(see Note 1). Certain restructuring accruals will be assumed by BASF,
which are reflected in net assets - discontinued business held for
sale in the Consolidated Condensed Balance Sheets. In the 2000 first
quarter, the Company continued its personnel reductions and completed
the closure of one research facility. At March 31, 2000, approximately
500 positions have been eliminated under this program. Activity in the
agricultural products restructuring accruals was as follows:
Other
Personnel Closure/
(In thousands) Costs Exit Costs Total
------------------------- ----------- ----------- -----------
Restructuring accruals at $69,888 $10,000 $79,888
December 31, 1999
Cash expenditures (16,140) (2,077) (18,217)
----------- ----------- -----------
Restructuring accruals at
March 31, 2000 $53,748 $7,923 $61,671
=========== =========== ===========
1998 Restructuring Charge and Related Asset Impairments
In December 1998, the Company recorded a special charge for
restructuring and related asset impairments of $343,600,000 to
recognize costs of the reorganization of its worldwide supply chains
and U.S. distribution systems, and the globalization of certain
business units. The restructuring will result in the reduction of
4,100 positions worldwide offset, in part, by 1,000 newly created
positions in the same functions at other locations. Since the end of
1999, the Company has continued its personnel reductions and has
completed the closure of the third and final distribution center. The
manufacturing plants are continuing their phase-out period, and the
Company will begin the disposal process in late 2000. At March 31,
2000, approximately 2,700 positions had been eliminated. The activity
in the restructuring accruals was as follows:
Other
Personnel Closure/
(In thousands) Costs Exit Costs Total
------------------------- ----------- ----------- -----------
Restructuring accruals at $54,753 $79,261 $134,014
December 31, 1999
Cash expenditures (18,705) (2,044) (20,749)
----------- ----------- -----------
Restructuring accruals at
March 31, 2000 $36,048 $77,217 $113,265
=========== =========== ===========
9
AMERICAN HOME PRODUCTS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
Note 5. Consolidation of Certain Subsidiaries
Effective January 1, 2000, the financial results of certain
pharmaceutical subsidiaries in Japan and India, which were previously
included on an equity basis, were consolidated in the results of the
Company due to changes in the Company's ability to exercise control
over the operations of these affiliates. The consolidation of the
subsidiaries resulted in higher net sales of 3%; however, it had no
impact on income from continuing operations.
Note 6. Company Data by Operating Segment
The Company has three reportable segments: Pharmaceuticals, Consumer
Health Care, and Corporate and All Other.
Income from Continuing
Operations before Federal
Net Sales and Foreign Taxes (1)
--------------------- ------------------------
Three Months Three Months
(In millions) Ended March 31, Ended March 31,
--------------------- ------------------------
Operating Segment 2000 1999 2000 1999
- --------------------- -------- -------- ---------- --------
Pharmaceuticals $2,740.6 $2,295.8 $754.2 $700.2
Consumer Health Care 595.9 562.2 126.3 123.6
-------- -------- ---------- --------
3,336.5 2,858.0 880.5 823.8
Corporate and All Other (2) - - 1,691.9 (73.5)
-------- -------- ---------- --------
Total $3,336.5 $2,858.0 $2,572.4 $750.3
======== ======== ========== ========
(1) Includes goodwill amortization for 2000 and 1999 as follows:
Pharmaceuticals - $40.2 and $38.5, and Consumer Health Care -
$3.8 and $4.0, respectively.
(2) Corporate and All Other for the 2000 first quarter included
income of $1,709.4 resulting from the receipt of a $1,800.0
termination fee provided for under the merger agreement with
Warner-Lambert Company offset, in part, by certain related
expenses.
10
AMERICAN HOME PRODUCTS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
Note 7. Earnings per Share
The following table sets forth the computations of Basic Earnings per
Share and Diluted Earnings per Share:
Three Months
Ended March 31,
------------------
(In thousands except per share amounts) 2000 1999
---------------------------------------- ------------- -------------
Income from continuing operations less
preferred dividends $1,745,997 $538,127
Income (loss) from discontinued
operations (1,469,647) 116,778
------------- -------------
Net income less preferred dividends $276,350 $654,905
Denominator:
Average number of common shares
outstanding 1,305,213 1,311,965
------------- -------------
Basic Earnings per Share from Continuing
Operations $1.34 $0.41
Basic Earnings (Loss) per Share from
Discontinued Operations (1.13) 0.09
------------- -------------
Basic Earnings per Share $0.21 $0.50
============= =============
Income from continuing operations $1,746,009 $538,140
Income (loss) from discontinued
operations (1,469,647) 116,778
------------- -------------
Net income $276,362 $654,918
Denominator:
Average number of common shares
outstanding 1,305,213 1,311,965
Common share equivalents of outstanding
stock options and deferred contingent
common stock awards 14,459 22,953
------------- -------------
Total shares 1,319,672 1,334,918
------------- -------------
Diluted Earnings per Share from
Continuing Operations $1.32 $0.40
Diluted Earnings (Loss) per Share from
Discontinued Operations (1.11) 0.09
------------- -------------
Diluted Earnings per Share $0.21 $0.49
============= =============
11
Management's Discussion and Analysis of Financial Condition
and Results of Operations
Three Months Ended March 31, 2000
Results of Operations
Management's discussion and analysis of results of operations for the 2000 first
quarter has been presented on an as-reported basis, except for sales variation
explanations which are presented on an as-reported and pro forma basis.
Effective January 1, 2000, certain pharmaceutical subsidiaries in Japan and
India, which were previously included on an equity basis, were consolidated in
the results of the Company. Pro forma sales results reflect the consolidation
of these subsidiaries as of January 1, 1999. The consolidation of the
subsidiaries had no impact on income from continuing operations.
On an as-reported basis, worldwide net sales for the 2000 first quarter were 17%
higher compared with prior year levels. On a pro forma basis, worldwide net
sales were 14% higher compared with prior year levels. The increase in pro
forma worldwide net sales for the 2000 first quarter was due primarily to higher
worldwide sales of pharmaceuticals and consumer health care products. Excluding
the negative impact of foreign exchange, pro forma worldwide net sales increased
16% for the 2000 first quarter.
The following table sets forth worldwide net sales results by operating segment
together with the percentage changes in "As-Reported" and "Pro Forma" worldwide
net sales from the comparable period in the prior year:
Net Sales
--------------------
Three Months
($ in millions) Ended March 31,
-------------------- As-Reported Pro Forma
Operating Segment 2000 1999 % Increase % Increase
- --------------------- ---------- ---------- ----------- ----------
Pharmaceuticals $2,740.6 $2,295.8 19% 16%
Consumer Health Care 595.9 562.2 6% 6%
---------- ---------- ----------- ----------
Total Net Sales $3,336.5 $2,858.0 17% 14%
========== ========== =========== ==========
The following sales variation explanations are presented on an as-reported and
pro forma basis:
On an as-reported basis, worldwide pharmaceutical sales increased 19% for
the 2000 first quarter. On a pro forma basis, worldwide pharmaceutical
sales increased 16% for the 2000 first quarter due primarily to higher
sales of MENINGITEC (introduced in the United Kingdom in the 1999 fourth
quarter), EFFEXOR XR (due primarily to expanded indications), ENBREL,
PREMARIN products, PREVNAR (introduced in the 2000 first quarter), REFACTO
(introduced in Europe in the 1999 second quarter) and ZOSYN offset, in
part, by lower sales of LODINE products (due to generic competition).
Excluding the negative impact of foreign exchange, pro forma worldwide
pharmaceutical sales increased 18% for the 2000 first quarter.
12
Management's Discussion and Analysis of Financial Condition
and Results of Operations
Three Months Ended March 31, 2000
On an as-reported and pro forma basis, worldwide consumer health care
sales increased 6% for the 2000 first quarter due primarily to higher
sales of nutritional supplements, principally CENTRUM products and
CALTRATE, as well as higher sales of ADVIL. Excluding the negative impact
of foreign exchange, pro forma worldwide consumer health care sales
increased 7% for the 2000 first quarter.
The following table sets forth, on a pro forma basis, the percentage changes in
worldwide net sales by operating and geographic segment compared to the prior
year, including the effect volume, price and foreign exchange had on these
percentage changes:
% Increase (Decrease)
Three Months Ended March 31, 2000
----------------------------------------
Foreign Total
Volume Price Exchange Net Sales
--------- --------- --------- ---------
Pharmaceuticals
- --------------------
U.S. 9% 8% - 17%
International 18% 1% (5%) 14%
----------------------------------------
Total 13% 5% (2%) 16%
========================================
Consumer Health Care
- --------------------
U.S. 4% 1% - 5%
International 10% 2% (4%) 8%
----------------------------------------
Total 5% 2% (1%) 6%
========================================
Total
- --------------------
U.S. 8% 7% - 15%
International 17% 1% (5%) 13%
----------------------------------------
Total 12% 4% (2%) 14%
========================================
Cost of goods sold, as a percentage of net sales, increased slightly to 24.8%
for the 2000 first quarter compared with 24.5% for the 1999 first quarter due
primarily to an unfavorable product mix in the pharmaceuticals segment.
Selling, general and administrative expenses increased 14% for the 2000 first
quarter. Higher selling, general and administrative expenses were due primarily
to higher selling expenses, including increased headcount, related to recent
pharmaceutical product launches and consumer health care product line
expansions, pre-launch marketing costs for certain pharmaceutical products
expected to be launched in the near future and direct-to-consumer promotional
costs for significant established pharmaceutical products.
13
Management's Discussion and Analysis of Financial Condition
and Results of Operations
Three Months Ended March 31, 2000
Research and development expenses increased 20% for the 2000 first quarter due
primarily to higher pharmaceutical research and development expenditures as a
result of payments for existing licensing agreements and costs for ongoing
clinical trials.
Interest expense, net decreased 23% for the 2000 first quarter due primarily to
higher interest income as a result of higher marketable securities offset, in
part, by increased borrowings to finance operations and an increase in interest
rates. Weighted average long-term debt outstanding during the 2000 and 1999
first quarters were $4,843.3 million and $4,190.5 million, respectively.
Other income, net decreased 35% for the 2000 first quarter due primarily to a
payment for access to an Alzheimer's vaccine collaboration, unfavorable foreign
exchange results and lower gains on the sales of non-strategic assets, including
certain non-core product rights, offset, in part, by an insurance recovery of
environmental costs and lower Year 2000 conversion costs.
During the 2000 first quarter, the Company and Warner-Lambert Company terminated
their merger agreement. The Company recorded income of $1,709.4 million
($1,111.1 million after-tax or $0.84 per share - diluted) in income from
continuing operations resulting from the receipt of a $1.8 billion termination
fee provided for under the merger agreement offset, in part, by certain related
expenses.
The following table sets forth worldwide income from continuing operations
before federal and foreign taxes by operating segment together with the
percentage changes from the comparable period in the prior year:
Income from Continuing
Operations before Federal
and Foreign Taxes (1)
-------------------------
Three Months
($ in millions) Ended March 31,
-------------------------
Operating Segment 2000 1999 % Increase
- -------------------------- ---------- ----------- ----------
Pharmaceuticals $754.2 $700.2 8%
Consumer Health Care 126.3 123.6 2%
---------- ----------- ----------
880.5 823.8 7%
Corporate and All Other (2) 1,691.9 (73.5) -
---------- ----------- ----------
Total (3) $2,572.4 $750.3 -
========== =========== ==========
14
Management's Discussion and Analysis of Financial Condition
and Results of Operations
Three Months Ended March 31, 2000
(1) Includes goodwill amortization for 2000 and 1999 as follows: Pharmaceuticals
- $40.2 and $38.5, and Consumer Health Care - $3.8 and $4.0, respectively.
(2) Corporate and All Other for the 2000 first quarter included income of
$1,709.4 resulting from the receipt of a $1,800.0 termination fee provided
for under the merger agreement with Warner-Lambert Company offset, in part,
by certain related expenses. Excluding the Warner-Lambert termination fee,
Corporate and All Other expenses, net decreased 76% for the 2000 first
quarter.
(3) Excluding the Warner-Lambert termination fee, total income from continuing
operations before federal and foreign taxes increased 15% for the 2000 first
quarter.
Worldwide pharmaceutical income from continuing operations before federal and
foreign taxes increased 8% for the 2000 first quarter due primarily to increased
worldwide sales offset, in part, by higher selling, general and administrative
expenses, higher research and development expenses, and lower other income, net.
Lower gains on the sales of non-strategic assets, a payment for access to an
Alzheimer's vaccine collaboration, unfavorable foreign exchange offset, in part,
by lower Year 2000 conversion costs were the causes for lower other income, net.
Worldwide consumer health care income from continuing operations before taxes
increased 2% for the 2000 first quarter due primarily to increased worldwide
sales offset, in part, by higher selling, general and administrative expenses.
Corporate and all other expenses, net, excluding the Warner-Lambert termination
fee, decreased for the 2000 first quarter due primarily to an insurance recovery
of environmental costs and lower interest expense in the 2000 first quarter.
The effective tax rate of continuing operations, excluding the effect of the
Warner-Lambert termination fee, decreased to 26.4% for the 2000 first quarter
compared with 28.3% for the 1999 first quarter due primarily to higher research
tax credits in the 2000 first quarter.
In March 2000, the Company announced that it signed a definitive agreement with
BASF for the sale of the agricultural products business. Under the terms of the
agreement, which is subject to certain customary conditions, including
regulatory approval, BASF will pay the Company $3.8 billion in cash and will
assume certain debt. As a result, the Company recorded an estimated after-tax
loss on the sale of this business of $1,573.0 million or $1.19 per share-diluted
and has reflected this business as a discontinued operation in the 2000 first
quarter. The loss on the sale included anticipated closing costs, which were
more than offset by estimated after-tax operating income of the agricultural
products business of $86.0 million from April 1, 2000 through June 30, 2000, the
anticipated disposal period. The loss on the sale was due primarily to a
difference in the basis of the net assets being sold for financial reporting
purposes compared to that for tax purposes. This difference related, for the
most part, to goodwill, which is not recognized for tax purposes in the proposed
sale. As a result, the transaction will generate a taxable gain, requiring the
recording of a tax provision, in addition to requiring a write-off of the net
assets in excess of the selling price. The agricultural products business had
income and diluted earnings per share from discontinued operations of $103.3
million and $0.08 for the 2000 first quarter compared to $116.8 million and
15
Management's Discussion and Analysis of Financial Condition
and Results of Operations
Three Months Ended March 31, 2000
$0.09 for the same period last year, respectively. Including the anticipated
loss on sale, the total loss and diluted loss per share from discontinued
operations were $1,469.6 million and $1.11, respectively, for the 2000 first
quarter.
Net income and diluted earnings per share for the 2000 first quarter were $276.4
million and $0.21 compared to $654.9 million and $0.49, respectively, for the
1999 first quarter. Excluding the after-tax loss from discontinued operations
of $1,469.6 million and $1.11, and the after-tax Warner-Lambert termination fee
of $1,111.1 and $0.84, respectively, income and diluted earnings per share from
continuing operations for the 2000 first quarter were $634.9 million and $0.48,
an increase of 18% and 20%, respectively, compared to income from continuing
operations in the 1999 first quarter. These increases were due primarily to
increased worldwide sales results offset, in part, by higher research and
development expenses.
Euro Currency
On January 1, 1999, 11 of the 15 member countries of the European Union adopted
the Euro as a new common legal currency. However, the legacy currencies of the
member countries are scheduled to remain legal tender as sub-denominations of
the Euro between January 1, 1999 and January 1, 2002 (the transition period).
Critical areas impacted by the conversion to the Euro have been identified and
appropriate strategies developed, which are currently being implemented to
facilitate the adoption of the Euro and to facilitate business transactions
during the transition period. The costs related to the Euro conversion and
transition period will not have a material adverse effect on the Company's
financial position or results of operations. However, the Euro conversion may
have competitive implications on the Company's pricing and marketing strategies,
the total impact of which is not known at this time.
Competition
The Company operates in the highly competitive pharmaceutical, consumer health
care and agrochemical industries. The Company is not dependent on any one
patent-protected product or line of products for a substantial portion of its
sales or results of operations. PREMARIN, the Company's principal conjugated
estrogens product manufactured from pregnant mare's urine, and related products
PREMPRO and PREMPHASE (which are single tablet combinations of the
conjugated estrogens in PREMARIN and the progestin medroxyprogesterone acetate),
are the leaders in their categories and contribute significantly to sales and
results of operations. PREMARIN's natural composition is not subject to patent
protection (although PREMPRO and PREMPHASE are subject to various patents). The
principal uses of PREMARIN, PREMPRO and PREMPHASE are to manage the symptoms of
menopause and to prevent osteoporosis, a condition involving a loss of bone mass
in postmenopausal women. Estrogen-containing products manufactured by other
companies have been marketed for many years for the treatment of menopausal
symptoms, and some of these products also have an approved indication for the
prevention of osteoporosis. During the past several years, other manufacturers
have introduced alternative products for the treatment and/or prevention of
osteoporosis. New products containing different estrogens than those found in
PREMPRO and PREMPHASE and having many of the same indications have also been
introduced. Some companies have attempted to obtain approval for generic
versions of PREMARIN. These products, if approved, would be routinely
substitutable for PREMARIN and related products under many state laws and third-
party insurance payer plans. In May 1997, the U.S. Food and Drug Administration
(FDA) announced that it would not approve certain synthetic estrogen products
16
Management's Discussion and Analysis of Financial Condition
and Results of Operations
Three Months Ended March 31, 2000
as generic equivalents of PREMARIN given known compositional differences between
the active ingredient of these products and PREMARIN. Although the FDA has not
approved any generic equivalent to PREMARIN to date, PREMARIN will continue to
be subject to competition from existing and new competing estrogen and other
products for its approved indications and may be subject to generic competition
from either synthetic or natural conjugated estrogens products in the future.
At least one other company has announced that it is in the process of developing
a generic version of PREMARIN from the same natural source, and the Company
currently cannot predict the timing or outcome of these or any other efforts.
Liquidity, Financial Condition and Capital Resources
Cash and cash equivalents increased $250.5 million in the 2000 first quarter to
$2,143.2 million. Cash flows from operating activities of $1,903.4 million
(which included a termination fee, net of related expenses, received from
Warner-Lambert Company of $1,709.4 million, and payments related to the REDUX
and PONDIMIN litigation of $639.6 million), proceeds from the sales and
maturities of marketable securities of $236.6 million, proceeds from sales of
other assets of $65.5 million and proceeds from the exercises of stock options
of $41.4 million were used principally for net repayments of debt of $1,036.3
million, dividend payments of $300.1 million, purchases of marketable securities
of $278.6 million, capital expenditures of $256.5 million and purchases of
treasury stock of $120.4 million. Capital expenditures included strategic
investments in manufacturing and distribution facilities worldwide and expansion
of the Company's research and development facilities.
Payments of $639.6 million were made in the 2000 first quarter pertaining to the
REDUX and PONDIMIN litigation. The litigation payments in the 2000 first
quarter may not be indicative of payments expected in future periods.
The Company's $1.0 billion of 7.70% notes, which matured on February 15, 2000,
were classified as current at December 31, 1999. In addition, $797.9 million
and $841.6 million of outstanding commercial paper at March 31, 2000 and
December 31, 1999, respectively, were classified as current, representing the
amount of the outstanding commercial paper borrowings in excess of the Company's
$2.0 billion credit facility that supports the commercial paper program. The
Company used a portion of the proceeds from the $1.8 billion termination fee
received as a result of the termination of the merger agreement with
Warner-Lambert to payoff the $1.0 billion of 7.70% notes on February 15, 2000.
At March 31, 2000, the fair value of the Company's outstanding debt was $4,508.8
million. If interest rates were to increase or decrease by one percentage
point, the fair value of the long-term debt would decrease or increase by
approximately $77.6 million.
The Company has established programs to protect against adverse changes in
exchange rates due to foreign currency volatility. At March 31, 2000, the fair
value of the $1,213.5 million notional amount of foreign currency contracts was
a net payable of $12.1 million. The foreign currency contracts consisted of
17
Management's Discussion and Analysis of Financial Condition
and Results of Operations
Three Months Ended March 31, 2000
purchased foreign exchange forward contracts and put options. If the
value of the U.S. dollar were to increase or decrease by 10% in relation to all
hedged foreign currencies, the net payable would increase or decrease by
approximately $90.6 million.
The notional amount related to the purchase of forward contracts designed to
protect balance sheet exposures totaled $707.8 million. As foreign exchange
rates change from period to period, the fluctuations in the fair value of the
foreign exchange forward contracts are offset by fluctuations in the fair value
of the underlying hedged transactions.
The notional amount related to the purchase of local currency put options
designed to protect future translation exposure totaled $505.7 million, $233.4
million of which were considered speculative and were marked to market and
recorded at fair value.
Year 2000
The Company successfully completed the Year 2000 rollover with no business
interruptions. There has been no material change in total costs since the last
estimate, and all costs have been substantially incurred at March 31, 2000. The
Company has not experienced any detrimental effects of the Year 2000 rollover in
the 2000 first quarter. The Company is not aware of any material problems
resulting from Year 2000 issues, either with the Company's products, internal
systems, or the Company's products and services of third parties. The Company
will continue to monitor mission critical computer applications and those of the
Company's suppliers and vendors throughout 2000 to ensure that any latent Year
2000 matters that may arise are addressed promptly.
Cautionary Statements for Forward Looking Information
This Form 10-Q, including management's discussion and analysis set forth above,
contains certain forward-looking statements, including, among other things,
statements regarding the Company's results of operations, Euro currency,
competition, liquidity, financial condition and capital resources, and the
comprehensive, national settlement relating to REDUX and PONDIMIN. These
forward-looking statements are based on current expectations. Certain factors
which could cause the Company's actual results to differ materially from
expected and historical results have been identified by the Company in its other
periodic reports filed with the Securities and Exchange Commission including the
Company's 1999 Annual Report on Form 10-K and Exhibit 99 to such report, which
exhibit is incorporated herein by reference.
18
Part II - Other Information
Item 1. Legal Proceedings
The Company and its subsidiaries are parties to numerous lawsuits and
claims arising out of the conduct of its business, including product
liability and other tort claims, the most significant of which are
described in the Company's Annual Report on Form 10-K for the year
ended December 31, 1999.
As of May 8, 2000, the Company has been served or is aware that it has
been named as a defendant in 9,871 suits as the manufacturer of
PONDIMIN and/or the distributor of REDUX. Of the 9,871 lawsuits
naming the Company as a defendant, 119 are actions that seek
certification of a class, some on a national and others on a
statewide basis. Of these 119 lawsuits, 50 are pending in various
federal district courts and 69 are pending in various state courts. A
number of the actions brought in state courts have been removed to
federal courts. Individual plaintiffs have filed the remaining
lawsuits: 1,820 such lawsuits are pending in various federal district
courts and 7,932 such lawsuits are pending in various state courts.
The 9,871 lawsuits contain a total of 20,381 plaintiffs (not including
spouse or consortium claims).
On April 13, 2000, the Company announced that it would proceed with
its comprehensive, nationwide diet drug settlement, which is subject
to judicial approval (and resolution of appeals, if any) following a
fairness hearing in the United States District Court for the Eastern
District of Pennsylvania, which took place on May 2-11, 2000. The
Company also announced that, although a final report has not yet been
submitted by the Interim Claims Administrators appointed by the Court,
approximately 200,000 individuals had registered for the settlement
and approximately 45,000 opted out during the 4-month opt-out period
that ended on March 30, 2000. A majority of those who registered have
elected the settlement's Accelerated Implementation Option, which
provides for prompt benefits and resolves the claims of those class
members.
In early May 2000, the Company received a grand jury subpoena from the
office of the United States Attorney for the District of Maryland
seeking documents regarding the Company's adverse event reporting
system and the reporting of adverse events related to REDUX and
PONDIMIN. The Company is in the process of responding to the subpoena
and continues to believe that its conduct with respect to the diet
drugs has at all times been lawful and appropriate.
In the opinion of the Company, although the outcome of any legal
proceedings cannot be predicted with certainty, the ultimate liability
of the Company in connection with its legal proceedings will not have a
material adverse effect on the Company's financial position but could
be material to the results of operations in any one accounting period.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit No. Description
(10.1) Purchase Agreement, by and among American Cyanamid
Company, American Home Products Corporation and BASF
Aktiengesellschaft, dated as of March 20, 2000
(Confidential Treatment Requested).
19
(12) Computation of Ratio of Earnings to Fixed Charges
(27.1) Financial Data Schedule - Period Ended March 31, 2000
(27.2) Restated Financial Data Schedule - Period Ended
March 31, 1999
(27.3) Restated Financial Data Schedule - Period Ended
December 31, 1999
(b) Reports on Form 8-K
On February 7, 2000, the Company filed a Current Report on Form 8-K
(including disclosure under Items 5 and 7) relating to the
termination of the proposed merger with Warner-Lambert Company.
20
Signature
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
AMERICAN HOME PRODUCTS CORPORATION
(Registrant)
By /s/ Paul J. Jones
Paul J. Jones
Vice President and Comptroller
(Duly Authorized Signatory
and Chief Accounting Officer)
Date: May 15, 2000
21
Exhibit Index
Exhibit No. Description
(10.1) Purchase Agreement, by and among American Cyanamid Company,
American Home Products Corporation and BASF Aktiengesellschaft,
dated as of March 20, 2000 (Confidential Treatment Requested).
(12) Computation of Ratio of Earnings to Fixed Charges
(27.1) Financial Data Schedule - Period Ended March 31, 2000
(27.2) Restated Financial Data Schedule - Period Ended March 31, 1999
(27.3) Restated Financial Data Schedule - Period Ended December 31, 1999
EX-1