FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
(Mark One)
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1996
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
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Commission File No. 1-2189
ABBOTT LABORATORIES
An Illinois Corporation I.R.S. Employer Identification
No. 36-0698440
100 Abbott Park Road
Abbott Park, Illinois 60064-3500
Telephone: (847) 937-6100
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 .
----- -----
As of April 30, 1996, the Corporation had 784,373,984 common shares without par
value outstanding.
PART 1 FINANCIAL INFORMATION
ABBOTT LABORATORIES AND SUBSIDIARIES
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
ABBOTT LABORATORIES AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF EARNINGS
(UNAUDITED)
(Dollars in thousands except per share data)
THREE MONTHS ENDED MARCH 31
---------------------------
1996 1995
---------- ----------
Net Sales..................................... $2,672,177 $2,524,397
---------- ----------
Cost of products sold......................... 1,156,217 1,088,911
Research and development...................... 268,616 247,175
Selling, general and administrative........... 572,346 598,832
---------- ----------
Total Operating Cost and Expenses........... 1,997,179 1,934,918
---------- ----------
Operating Earnings............................ 674,998 589,479
---------- ----------
Interest expense.............................. 17,607 13,952
Interest income............................... (10,490) (11,010)
Other (income) expense, net................... (13,124) (5,313)
---------- ----------
Earnings Before Taxes......................... 681,005 591,850
Taxes on Earnings............................. 200,896 174,596
---------- ----------
Net Earnings.................................. $ 480,109 $ 417,254
---------- ----------
---------- ----------
Net Earnings Per Common Share................. $.61 $.52
---------- ----------
---------- ----------
Cash Dividends Declared
Per Common Share............................ $.24 $.21
---------- ----------
---------- ----------
The accompanying notes to condensed consolidated financial statements are an
integral part of this statement.
2
ABBOTT LABORATORIES AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEET
(Dollars in Thousands)
MARCH 31 DECEMBER 31
1996 1995
----------- ----------
(unaudited)
ASSETS
Current Assets:
Cash and cash equivalents. . . . . . . . . . . . . . . . . . . . $ 87,922 $ 281,197
Investment securities. . . . . . . . . . . . . . . . . . . . . . 44,035 34,500
Trade Receivables, less allowances of $156,167 in 1996
and $157,990 in 1995 . . . . . . . . . . . . . . . . . . . . . 1,562,321 1,563,038
Inventories:
Finished products. . . . . . . . . . . . . . . . . . . . . . . 573,346 560,637
Work in process. . . . . . . . . . . . . . . . . . . . . . . . 268,983 238,943
Materials. . . . . . . . . . . . . . . . . . . . . . . . . . . 314,589 311,361
----------- -----------
Total Inventories . . . . . . . . . . . . . . . . . . . . . 1,156,918 1,110,941
Prepaid expenses, income taxes, and other receivables. . . . . . 1,262,070 1,237,035
----------- -----------
Total Current Assets. . . . . . . . . . . . . . . . . . . . 4,113,266 4,226,711
----------- -----------
Investment Securities Maturing after One Year. . . . . . . . . . . 398,063 422,547
----------- -----------
Property and Equipment, at Cost. . . . . . . . . . . . . . . . . . 7,895,249 7,762,442
Less: accumulated depreciation and amortization. . . . . . . . . 3,621,131 3,512,904
----------- -----------
Net Property and Equipment. . . . . . . . . . . . . . . . . 4,274,118 4,249,538
Deferred Charges and Other Assets. . . . . . . . . . . . . . . . . 526,573 513,784
----------- -----------
$ 9,312,020 $ 9,412,580
----------- -----------
----------- -----------
LIABILITIES AND SHAREHOLDERS' INVESTMENT
Current Liabilities:
Short-term borrowings and current portion of long-term debt. . . $ 675,337 $ 1,049,863
Trade accounts payable . . . . . . . . . . . . . . . . . . . . . 709,148 755,921
Salaries, income taxes, dividends payable, and other accruals. . 2,107,010 1,984,530
----------- -----------
Total Current Liabilities . . . . . . . . . . . . . . . . . 3,491,495 3,790,314
----------- -----------
Long-Term Debt . . . . . . . . . . . . . . . . . . . . . . . . . . 433,724 435,198
----------- -----------
Other Liabilities and Deferrals. . . . . . . . . . . . . . . . . . 821,134 790,221
----------- -----------
Shareholders' Investment:
Preferred shares, $1 par value
Authorized - 1,000,000 shares, none issued
Common shares, without par value
Authorized - 1,200,000,000 shares
Issued at stated capital amount -
Shares: 1996: 794,800,514; 1995: 797,021,211. . . . . . . . 608,933 581,562
Earnings employed in the business. . . . . . . . . . . . . . . . . 4,074,555 3,926,917
Cumulative translation adjustments . . . . . . . . . . . . . . . . (60,503) (55,646)
----------- -----------
4,622,985 4,452,833
Less:
Common shares held in treasury, at cost -
Shares: 1996: 9,667,579; 1995: 9,714,379 . . . . . . . . . . . . 51,021 51,268
Unearned compensation - restricted stock awards. . . . . . . . . . 6,297 4,718
----------- -----------
Total Shareholders' Investment. . . . . . . . . . . . . . . 4,565,667 4,396,847
----------- -----------
$ 9,312,020 $ 9,412,580
----------- -----------
----------- -----------
The accompanying notes to condensed consolidated financial statements are an
integral part of this statement.
3
ABBOTT LABORATORIES AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(UNAUDITED)
(Dollars in thousands)
THREE MONTHS ENDED MARCH 31
---------------------------
1996 1995
---------- ---------
Cash Flow From (Used in) Operating Activities:
Net earnings....................................... $ 480,109 $ 417,254
Adjustments to reconcile net earnings to
net cash from operating activities -
Depreciation and amortization...................... 163,308 137,083
Trade receivables.................................. (4,861) (74,377)
Inventories........................................ (48,893) 16,549
Other, net......................................... 94,503 11,820
---------- ---------
Net Cash From Operating Activities............ 684,166 508,329
---------- ---------
Cash Flow From (Used in) Investing Activities:
Acquisitions of property, equipment, and businesses (229,823) (280,568)
Investment securities transactions................. 14,818 (119,487)
Other.............................................. 5,670 3,930
---------- ---------
Net Cash (Used in) Investing Activities....... (209,335) (396,125)
---------- ---------
Cash Flow From (Used in) Financing Activities:
Borrowing transactions............................. (374,476) 104,179
Common share transactions.......................... (126,639) (167,091)
Dividends paid..................................... (165,395) (152,616)
---------- ---------
Net Cash (Used in) Financing Activities....... (666,510) (215,528)
---------- ---------
Effect of exchange rate changes on cash and
cash equivalents................................... (1,596) (2,738)
---------- ---------
Net (Decrease) in Cash and Cash Equivalents............ (193,275) (106,062)
Cash and Cash Equivalents, Beginning of Year........... 281,197 290,272
---------- ---------
Cash and Cash Equivalents, End of Period............... $ 87,922 $ 184,210
---------- ---------
---------- ---------
The accompanying notes to condensed consolidated financial statements are an
integral part of this statement.
4
ABBOTT LABORATORIES AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1996
(UNAUDITED)
NOTE 1 - BASIS OF PREPARATION:
The accompanying unaudited, condensed consolidated financial statements have
been prepared pursuant to rules and regulations of the Securities and Exchange
Commission and, therefore, do not include all information and footnote
disclosures normally included in audited financial statements. However, in the
opinion of management, all adjustments (which include only normal adjustments)
necessary to present fairly the financial position, cash flows, and results of
operations have been made. It is suggested that these statements be read in
conjunction with the financial statements included in the Company's Annual
Report on Form 10-K for the year ended December 31, 1995.
NOTE 2 - EARNINGS PER COMMON SHARE:
Earnings per common share amounts are computed by using the weighted average
number of common shares outstanding. These shares averaged 785,836,000 for the
three months ended March 31, 1996 and 801,262,000 for the same period in 1995.
NOTE 3 - TAXES ON EARNINGS:
Taxes on earnings reflect the estimated annual effective tax rates. The
effective tax rates are less than the statutory U.S. Federal income tax rate
principally due to tax incentive grants related to subsidiaries operating in
Puerto Rico, the Dominican Republic, Italy, Ireland, and the Netherlands.
5
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1996
(Unaudited), Continued
NOTE 4 - LITIGATION AND ENVIRONMENTAL MATTERS:
The Company is involved in various claims and legal proceedings including
numerous antitrust suits and investigations in connection with the sale and
marketing of infant formula products and the pricing of prescription
pharmaceuticals.
In addition, the Company has been identified as a potentially responsible party
for investigation and cleanup costs at a number of locations in the United
States and Puerto Rico under Federal remediation laws and is voluntarily
investigating potential contamination at a number of Company-owned locations.
The matters above are discussed more fully in Item 1, Business - Environmental
Matters, and Item 3, Legal Proceedings, in the Annual Report on Form 10-K, which
is available upon request, and in Part II, Item 1, Legal Proceedings, in this
Form.
The Company expects that within the next year, progress in the legal proceedings
described above may cause a change in the estimated reserves recorded by the
Company. While it is not feasible to predict the outcome of such pending
claims, proceedings, investigations and remediation activities with certainty,
management is of the opinion that their ultimate disposition should not have a
material adverse effect on the Company's financial position, cash flows, or
results of operations.
NOTE 5 - ACQUISITIONS:
In March 1996, the Company and MediSense, Inc. ("MediSense") signed a definitive
agreement through which Abbott will acquire MediSense, a manufacturer of blood
glucose self-testing products. Under the terms of the agreement, the Company
has made a tender offer to acquire 100 percent of the outstanding shares of
MediSense for approximately $876 million in cash. The purchase price will be
allocated to purchased research and development, goodwill, and the fair value of
net assets acquired based on pending valuations. Acquisition of the majority of
the outstanding shares of MediSense will occur in the second quarter of 1996.
Had this acquisition taken place on January 1, 1995, consolidated sales and net
income would not have been significantly different from reported amounts.
The Company currently owns 70 percent of the capital stock of a Japanese
subsidiary. During the first quarter, the Company entered into an agreement
with the minority interest shareholder to purchase their 30 percent ownership
over a ten-year period.
6
FINANCIAL REVIEW
RESULTS OF OPERATIONS - FIRST QUARTER 1996 COMPARED WITH FIRST QUARTER 1995
Worldwide sales for the first quarter increased 5.9 percent to $2.672 billion
from $2.524 billion in 1995. Net earnings and earnings per share increased
15.1 percent and 17.3 percent, respectively, over the prior year quarter.
Gross profit margin (sales less cost of products sold, including freight and
distribution expenses) of 56.7 percent for the first quarter was down from
56.9 percent one year ago. This decrease was primarily due to higher project
expense for new products and the effects of inflation; partially offset by
favorable product mix, especially sales of pharmaceuticals, and productivity
improvements.
Research and development expenses increased to $268.6 million in the first
quarter 1996. This represented 10.1 percent of net sales, compared to
9.8 percent in 1995. The majority of research and development expenditures
continues to be concentrated on pharmaceutical and diagnostic products.
Selling, general, and administrative expenses for the first quarter decreased
4.4 percent from the prior year as the result of lower charges for litigation in
1996 and non-recurring contributions to the Company's charitable foundation in
1995. These decreases were partially offset by additional selling and marketing
support for new and existing products, primarily pharmaceuticals and
nutritionals.
Other (income) expense, net, includes net foreign exchange losses of
$9.3 million in the 1996 first quarter, compared with net foreign exchange
losses of $8.4 million in the same quarter last year.
7
FINANCIAL REVIEW
(Continued)
INDUSTRY SEGMENTS
Industry segment sales for the first quarter 1996 and the related change from
the comparable 1995 period are shown in the table below. The Pharmaceutical and
Nutritional Products segment includes a broad line of adult and pediatric
pharmaceuticals and nutritionals, which are sold primarily on the prescription
or recommendation of physicians or other health care professionals; consumer
products; agricultural and chemical products; and bulk pharmaceuticals. The
Hospital and Laboratory Products segment includes diagnostic systems for blood
banks, hospitals, commercial laboratories and alternate-care testing sites;
intravenous and irrigation fluids and related administration equipment; drugs
and drug delivery systems; anesthetics; critical care products; and other
medical specialty products for hospitals and alternate-care sites.
Domestic and international sales for the first quarter primarily reflect unit
growth. International sales were unfavorably affected 0.1 percent by the
relatively stronger U.S. dollar in the first quarter.
First Quarter
- ----------------------------------------------------------------------
SEGMENT SALES 1996 Percent
(in millions of dollars) Sales Increase
- ----------------------------------------------------------------------
Pharmaceutical and Nutritional Products:
Domestic $1,040.5 6.2
- ----------------------------------------------------------------------
International 559.2 12.8
- ----------------------------------------------------------------------
1,599.7 8.4
Hospital and Laboratory Products:
Domestic 575.1 0.1
- ----------------------------------------------------------------------
International 497.4 4.9
- ----------------------------------------------------------------------
1,072.5 2.2
Total All Segments:
Domestic 1,615.6 3.9
- ----------------------------------------------------------------------
International 1,056.6 8.9
- ----------------------------------------------------------------------
$2,672.2 5.9
- ----------------------------------------------------------------------
- ----------------------------------------------------------------------
8
FINANCIAL REVIEW
(Continued)
LIQUIDITY AND CAPITAL RESOURCES AT MARCH 31, 1996
COMPARED WITH DECEMBER 31, 1995
Net cash from operating activities for the first quarter 1996 totaled
$684 million. The Company expects annual cash flow from operating activities to
continue to approximate or exceed the Company's capital expenditures and cash
dividends. The Company will fund its acquisition of MediSense through
commercial paper borrowings.
The Company has maintained its favorable bond ratings (AAA by Standard & Poor's
Corporation and Aa1 by Moody's Investors Service) and continues to have readily
available financial resources, including unused domestic lines of credit of
$400 million at March 31, 1996. These lines of credit support domestic
commercial paper borrowing arrangements.
During the first quarter 1996, the Company continued its program to purchase its
common shares. The Company purchased and retired 3,655,000 shares during this
period at a cost of $152 million. As of March 31, 1996, an additional 9,715,000
shares may be purchased in future periods under authorization granted by the
Board of Directors in September 1995.
LEGISLATIVE ISSUES
The Company's primary markets are highly competitive and subject to substantial
government regulation. The Company expects debate to continue at both the
federal and the state levels over the availability, method of delivery, and
payment for health care products and services. The Company believes that if
legislation is enacted, it could have the effect of reducing prices, or reducing
the rate of price increases for medical products and services. International
operations are also subject to a significant degree of government regulation.
It is not possible to predict the extent to which the Company or the health care
industry in general might be adversely affected by these factors in the future.
A more complete discussion of these factors is contained in Item 1, Business, in
the Annual Report on Form 10-K, which is available upon request.
9
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company's 10-K for the fiscal year ended December 31, 1995
described 23 antitrust suits, one shareholder derivative suit, and 5
investigations (as of January 31, 1996) that had been brought in connection with
the Company's marketing and sale of infant formula products. During the first
quarter, the Company entered into an agreement to settle 20 of these 23
antitrust suits. The 20 cases that are covered by the settlement agreement are
the cases that are pending or on appeal in the following courts: Calhoun
County, Alabama (2 cases); Boulder County, Colorado; Okaloosa County, Florida;
St. Clair County, Illinois; Sedgwick County, Kansas; Jefferson County, Kentucky;
Calhoun County, Michigan; Hennepin County, Minnesota; Ramsay County, Minnesota;
Holmes County, Mississippi; Washoe County, Nevada; Jackson County, North
Carolina; Burleigh County, North Dakota; Holmes County, South Dakota; Blount
County, Tennessee; Kanwaha County, West Virginia; and Milwaukee County,
Wisconsin (2 cases) and one (1) case pending in federal court in Louisiana.
Except for Mississippi, where the settlement has become final, each state's
settlement becomes final only when it has been approved by the court in that
state. Under the terms of the agreement, without admitting any liability, the
Company will pay an aggregate amount of approximately $25 million in cash to
resolve the cases pending in Illinois, Louisiana, Minnesota, Mississippi, North
Dakota, South Dakota, West Virginia, and Wisconsin and will provide infant
formula products having an aggregate value of approximately $7.5 million
dollars to resolve the cases pending in Alabama, Colorado, Florida, Kansas,
Kentucky, Michigan, Nevada, North Carolina, and Tennessee.
The Company's 10-K for the fiscal year ended December 31, 1995
described 133 antitrust suits (as of January 31, 1996) in connection with the
Company's pricing of prescription pharmaceuticals. As of March 31, 1996, a
total of 139 cases and one investigation were pending in connection with the
Company's pricing of prescription pharmaceuticals. In a letter dated March 13,
1996, the Federal Trade Commission (the "FTC") informed the Company that the FTC
is conducting an investigation to determine whether the Company has engaged or
is engaging in unfair competition in relation to the pricing of pharmaceutical
products in the United States. During the first quarter of 1996, four new
federal antitrust suits regarding the Company's pricing of prescription
pharmaceuticals commenced and were consolidated in litigation that is pending in
federal court in Chicago, Illinois, and is known as IN RE: BRAND NAME
PRESCRIPTION DRUG ANTITRUST LITIGATION, MDL 997 ("MDL 997"). In addition,
the following cases have been filed in state or local courts since January 31,
1996: RICHARD M. KERR V. ABBOTT, ET. AL., pending in Hennepin County,
Minnesota, and HERBERT L. GODA V. ABBOTT, ET. AL., pending in the District of
Columbia. The above-mentioned cases allege that various pharmaceutical
manufacturers have conspired to fix prices for prescription pharmaceuticals
and/or discriminate in pricing to retail pharmacies by providing discounts to
mail-order pharmacies, institutional pharmacies, and health maintenance
organizations in violation of various state and federal antitrust laws. The
suits have been brought on behalf of retail pharmacies and/or individual
consumers and name the Company and other pharmaceutical manufacturers, as well
as pharmaceutical wholesalers, and at least one mail-order pharmacy as
defendants. The plaintiffs seek treble damages in an unspecified amount, civil
penalties and other relief. The Company has filed or intends to file a response
to each of the complaints denying all substantive allegations.
The Company's 10-K for the fiscal year ending December 31, 1995 also
reported that the Company had entered into an agreement to settle the class
action portion of the MDL 997 litigation. That settlement agreement had to be
approved by the federal court before it became final and effective. On April 4,
1996, the federal court disapproved the settlement agreement. The Company has
filed a request for permission to seek an interlocutory appeal of the denial of
the settlement agreement to the Federal Court of Appeals for the Seventh
Circuit.
On March 15, 1996, the North Carolina Department of Environment, Health,
and Natural Resources (the "Department") issued a Notice of Initiation of
Enforcement Action to the Company. The Department alleges that during the
period between 1987 and 1993 the Company violated certain air quality
regulations in North Carolina. The Company has filed a response to the
notice.
While it is not feasible to predict the outcome of such pending claims,
proceedings, and investigations with certainty, management is of the opinion
that their ultimate disposition should not have a material adverse effect on the
Company's financial position, cash flows, or results of operations.
ITEM 4. SUBMISSION OF MATTERS OF A VOTE OF SECURITY HOLDERS
The Company held its Annual Meeting of Shareholders on April 26, 1996.
The following is a summary of the matters voted on at that meeting.
(a) The shareholders elected the Company's entire Board of Directors.
The persons elected to the Company's Board of Directors and the number of shares
cast for, and the number of shares withheld, with respect to each of these
persons were as follows:
Name Votes For Votes Withheld
---- --------- --------------
K. Frank Austen, M.D. 683,785,349 3,221,275
Duane L. Burnham 682,835,825 4,170,799
H. Laurance Fuller 683,883,006 3,123,618
Thomas R. Hodgson 684,025,152 2,981,472
Allen F. Jacobson 683,069,092 3,937,532
David A. Jones 682,282,831 4,723,793
The Lord Owen CH 683,488,130 3,518,494
Boone Powell, Jr. 683,998,818 3,007,806
Addison Barry Rand 683,886,662 3,119,962
W. Ann Reynolds, Ph.D. 682,553,675 4,452,949
William D. Smithburg 683,755,886 3,250,738
John R. Walter 683,080,262 3,926,362
William L. Weiss 683,385,399 3,621,225
(b) The shareholders approved the Abbott Laboratories 1996 Incentive
Stock Program.
FOR 614,012,674 AGAINST 63,982,488
ABSTAIN 8,990,176 BROKER NON-VOTE 21,286
(c) The shareholders ratified the appointment of Arthur Andersen LLP as
auditors of the Company.
FOR 682,607,776 AGAINST 2,014,558 ABSTAIN 2,384,290
ITEM 6. Exhibits and Reports on Form 8-K
(a) Exhibits
11. Statement re: computation of per share earnings - attached
hereto.
12. Statement re: computation of ratio of earnings to fixed
charges - attached hereto.
27. Financial Data Schedule - attached hereto.
(b) Reports on Form 8-K
One report on Form 8-K was filed during the quarter ended March
31, 1996. In a Form 8-K dated March 29, 1996, the Company
reported that the Company and MediSense, Inc. ("MediSense") had
signed a definitive agreement through which the Company will
acquire MediSense and pursuant to which the Company would make a
tender offer to acquire 100 percent of the outstanding shares of
MediSense.
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.
ABBOTT LABORATORIES
Date: May 14, 1996 /s/ Theodore A. Olson
Theodore A. Olson, Vice President
and Controller (Principal
Accounting Officer)