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 June 30, 1996
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _________ to _________
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 July 31, 1996, the Corporation had 780,545,080 common shares without par
value outstanding.
PART 1 FINANCIAL INFORMATION
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ABBOTT LABORATORIES AND SUBSIDIARIES
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CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
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(UNAUDITED)
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ABBOTT LABORATORIES AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF EARNINGS
(UNAUDITED)
(Dollars in thousands except per share data)
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30 JUNE 30
------------------------- -------------------------
1996 1995 1996 1995
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Net sales............................. $2,699,240 $2,500,310 $5,371,417 $5,024,707
---------- ---------- ---------- ----------
Cost of products sold................. 1,143,947 1,086,023 2,300,164 2,174,934
Research and development.............. 304,846 287,360 573,462 534,535
Selling, general and administrative... 598,866 532,277 1,171,212 1,131,109
---------- ---------- ---------- ----------
Total Operating Cost and Expenses... 2,047,659 1,905,660 4,044,838 3,840,578
---------- ---------- ---------- ----------
Operating Earnings.................... 651,581 594,650 1,326,579 1,184,129
---------- ---------- ---------- ----------
Interest expense...................... 22,228 17,852 39,835 31,804
Interest income....................... (10,186) (13,202) (20,676) (24,212)
Other (income) expense, net........... (27,728) (11,461) (40,852) (16,774)
---------- ---------- ---------- ----------
Earnings Before Taxes................. 667,267 601,461 1,348,272 1,193,311
Taxes on Earnings..................... 196,844 177,431 397,740 352,027
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Net Earnings.......................... $ 470,423 $ 424,030 $ 950,532 $ 841,284
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---------- ---------- ---------- ----------
Net Earnings Per Common Share......... $.60 $.53 $1.21 $1.05
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---------- ---------- ---------- ----------
Cash Dividends Declared
Per Common Share.................... $.24 $.21 $.48 $.42
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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)
JUNE 30 DECEMBER 31
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1996 1995
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(UNAUDITED)
ASSETS
Current Assets:
Cash and cash equivalents................................................... $ 111,482 $ 281,197
Investment securities....................................................... 66,189 34,500
Trade Receivables, less allowances of $147,550 in 1996
and $157,990 in 1995...................................................... 1,643,909 1,563,038
Inventories:
Finished products......................................................... 617,820 560,637
Work in process........................................................... 269,727 238,943
Materials................................................................. 307,695 311,361
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Total inventories...................................................... 1,195,242 1,110,941
Prepaid income taxes........................................................ 647,876 651,436
Other prepaid expenses and receivables...................................... 661,707 585,599
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Total Current Assets................................................... 4,326,405 4,226,711
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Investment Securities Maturing after One Year................................... 468,219 422,547
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Property and Equipment, at Cost................................................. 8,044,533 7,762,442
Less: accumulated depreciation and amortization............................. 3,709,198 3,512,904
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Net Property and Equipment............................................. 4,335,335 4,249,538
Deferred Charges, Goodwill and Other Assets..................................... 1,423,915 513,784
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$10,553,874 $ 9,412,580
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LIABILITIES AND SHAREHOLDERS' INVESTMENT
Current Liabilities:
Short-term borrowings and current portion of long-term debt.................. $ 1,670,537 $ 1,049,863
Trade accounts payable....................................................... 806,290 755,921
Salaries, income taxes, dividends payable, and other accruals................ 2,049,997 1,984,530
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Total Current Liabilities............................................... 4,526,824 3,790,314
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Long-Term Debt................................................................... 433,437 435,198
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Other Liabilities and Deferrals:
Deferred Income Taxes........................................................ 176,557 67,993
Other ....................................................................... 776,560 722,228
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Total Other Liabilities and Deferrals .................................. 953,117 790,221
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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 -
1996: 791,001,929 shares; 1995: 797,021,211 shares...................... 628,216 581,562
Earnings employed in the business................................................ 4,158,481 3,926,917
Cumulative Translation Adjustments............................................... (89,379) (55,646)
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4,697,318 4,452,833
Less:
Common shares held in treasury, at cost -
1996: 9,661,672 shares; 1995: 9,714,379 shares............................... 50,990 51,268
Unearned compensation - restricted stock awards.................................. 5,832 4,718
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Total Shareholders' Investment.......................................... 4,640,496 4,396,847
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$10,553,874 $ 9,412,580
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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)
SIX MONTHS ENDED JUNE 30
------------------------
1996 1995
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Cash Flow From (Used in) Operating Activities:
Net earnings....................................... $ 950,532 $ 841,284
Adjustments to reconcile net earnings to
Net cash from operating activities -
Depreciation and amortization...................... 319,262 260,286
Trade receivables.................................. (88,477) 3,604
Inventories........................................ (83,521) (8,656)
Other, net......................................... 81,214 (61,303)
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Net Cash From Operating Activities............ 1,179,010 1,035,215
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Cash Flow From (Used in) Investing Activities:
Acquisitions of property and equipment............. (460,908) (485,627)
Acquisition of MediSense, net of cash acquired..... (806,738) -
Investment securities transactions................. (50,757) (104,105)
Other.............................................. 13,787 11,092
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Net Cash (Used in) Investing Activities....... (1,304,616) (578,640)
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Cash Flow From (Used in) Financing Activities:
Borrowing transactions............................. 620,517 184,038
Common share transactions.......................... (305,876) (355,741)
Dividends paid..................................... (353,899) (320,432)
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Net Cash (Used in) Financing Activities....... (39,258) (492,135)
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Effect of exchange rate changes on cash and
cash equivalents................................... (4,851) (317)
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Net (Decrease) in Cash and Cash Equivalents............ (169,715) (35,877)
Cash and Cash Equivalents, Beginning of Year........... 281,197 290,272
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Cash and Cash Equivalents, End of Period............... $ 111,482 $ 254,395
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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
JUNE 30, 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 784,547,000 for the
six months ended June 30, 1996 and 799,246,000 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
JUNE 30, 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 - ACQUISITION OF MEDISENSE:
In May 1996, the Company acquired, for cash, substantially all of the
outstanding shares of MediSense, Inc. (MediSense), a manufacturer of blood
glucose self-testing products. The Company is finalizing the appraisal to
determine the purchase price allocation. However, a substantial portion of
the purchase price is expected to be allocated to intangible assets,
including goodwill, which will be amortized on a straight-line basis over up
to 40 years. In addition, $35.2 million was charged against earnings for
in-process research and development. Had this acquisition occurred on
January 1, 1995, consolidated sales and net income would not have been
significantly different from reported amounts.
6
FINANCIAL REVIEW
RESULTS OF OPERATIONS - SECOND QUARTER AND FIRST SIX MONTHS 1996 COMPARED WITH
SAME PERIODS IN 1995
Worldwide sales for the second quarter and first six months increased
8.0 percent and 6.9 percent, respectively, over the comparable 1995 periods.
Net earnings increased 10.9 percent and 13.0 percent, respectively, in the
second quarter and first six months 1996. Earnings per share increased 13.2
percent and 15.2 percent, respectively, over the prior year periods.
Gross profit margin (sales less cost of products sold, including freight and
distribution expenses) was 57.6 percent for the 1996 second quarter, compared to
56.6 percent for the 1995 second quarter. First half gross margin was
57.2 percent, compared to 56.7 percent a year earlier. These increases are due
primarily to favorable product mix, especially higher sales of pharmaceuticals,
and productivity improvements; partially offset by higher project expenses for
new products and the effects of inflation.
Research and development expenses were $304.8 million and $573.5 million for
the second quarter and first six months 1996, respectively, including $35.2
million of acquired research and development related to the purchase of
MediSense. The second quarter and six month 1995 results included a similar
charge for the acquisition of certain technologies. Research and development
represented 11.3 percent and 10.7 percent of net sales, compared to 11.5
percent and 10.6 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 second quarter and first
six months 1996 increased 12.5 percent and 3.5 percent, respectively, over
the comparable prior year periods, net of the favorable effect of the
relatively stronger U.S. dollar of 2.4 percent and 1.1 percent, respectively.
The net increases reflect additional selling and marketing support for new
and existing products, primarily for pharmaceutical and nutritional products,
partially offset for the six months 1996 by lower litigation expenses and
because no contributions were made to the Company's charitable foundation in
1996.
Other (income) expense, net, includes net foreign exchange losses of
$3.8 million and $13.2 million, respectively, for the second quarter and first
six months 1996 compared with net foreign exchange losses of $7.1 million and
$15.5 million for the corresponding prior year periods.
7
FINANCIAL REVIEW
(Continued)
INDUSTRY SEGMENTS
Industry segment sales for the second quarter and first six months 1996 and the
related change from the comparable 1995 periods 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, and consumers; 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 second quarter and first six months
1996 primarily reflect unit growth. International sales were unfavorably
affected 5.3 percent by the relatively stronger dollar in the second quarter.
On a year-to-date basis, international sales were unfavorably affected 2.8
percent by the relatively stronger U.S. dollar.
Second Quarter Six Months
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SEGMENT SALES 1996 Percent 1996 Percent
(In millions of dollars) Sales Increase Sales Increase
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Pharmaceutical and Nutritional Products:
Domestic $ 995.3 11.2 $2,035.8 8.6
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International 535.7 7.6 1,094.9 10.2
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1,531.0 9.9 3,130.7 9.1
Hospital and Laboratory Products:
Domestic 620.1 5.2 1,195.2 2.7
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International 548.1 5.9 1,045.5 5.4
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1,168.2 5.5 2,240.7 3.9
Total All Segments:
Domestic 1,615.4 8.8 3,231.0 6.3
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International 1,083.8 6.7 2,140.4 7.8
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$2,699.2 8.0 $5,371.4 6.9
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8
FINANCIAL REVIEW
(Continued)
LIQUIDITY AND CAPITAL RESOURCES AT JUNE 30, 1996
COMPARED WITH DECEMBER 31, 1995
Net cash from operating activities for the first six months 1996 totaled
$1.179 billion. 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 funded the 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
$1.5 billion at June 30, 1996. These lines of credit back up domestic
commercial paper borrowing arrangements.
During the first six months 1996, the Company continued its program to purchase
its common shares. The Company purchased and retired 8,415,000 shares during
this period at a cost of $351 million. As of June 30, 1996, an additional
4,955,000 shares may be purchased in future periods under authorization granted
by the Board of Directors in September 1995.
In June 1996, the Company filed a registration statement with the Securities and
Exchange Commission. The Company may issue up to $650 million of debt
securities in the future under this registration statement.
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-Q for the fiscal quarter ended March 31, 1996
described 23 antitrust suits, one shareholder derivative suit, and 5
investigations that had been brought in connection with the Company's
marketing and sale of infant formula products. It also reported that the
Company had entered into an agreement to settle 20 of these 23 antitrust
suits; that one of the 20 cases covered by the agreement had been finally
settled; and that the settlement of each of the remaining 19 cases would only
become final when it had been approved by the court in the state where it was
pending. On June 7, 1996 the court in Wisconsin gave its final approval to
the settlement of the two cases that were pending in that state. The
settlements of the 17 remaining cases have not yet been finalized. On June
11, 1996 the Illinois Court of Appeals (First District) dismissed plaintiff's
appeal of the previous dismissal of the one shareholder derivative
suit that had been pending before it. As of June 30, 1996, a total of 20
antitrust suits and 5 investigations are pending in connection with the
Company's marketing and sale of infant formula products.
The Company's 10-Q for the fiscal quarter ending March 31, 1996
reported that the Company had entered into a settlement agreement for the class
action portion of litigation that is pending in federal court in Chicago,
Illinois and is known as IN RE: BRAND NAME PRESCRIPTION DRUG ANTITRUST
LITIGATION, MDL 997; that the settlement agreement had to be approved by the
federal court before it became final and effective; that on April 4, 1996, the
federal court disapproved the settlement agreement; and that the Company had
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 May 16, 1996 the court denied this request. As of June 30, 1996,
139 cases and one Federal Trade Commission investigation are pending in
connection with the Company's pricing of brand name prescription
pharmaceuticals.
The Company's 10-Q for the fiscal quarter ending March 31, 1996
reported that on March 15, 1996, the North Carolina Department of Environment,
Health, and Natural Resources ("DEHNR") issued a Notice of Initiation of
Enforcement Action to the Company alleging that during the period between 1987
and 1993 the Company violated certain air quality regulations in North Carolina.
On July 1, 1996 the Company received a civil penalty assessment from the DEHNR
for $968,763.58 in connection with this enforcement action. The Company is
contesting the assessment.
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 6. Exhibits and Reports on Form 8-K
(a) Exhibits
10.1 Abbott Laboratories 1996 Incentive Stock Program* -
attached hereto.
10.2 Amended Abbott Laboratories Supplemental Pension
Plan* - attached hereto.
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
No reports on Form 8-K were filed during the quarter ended June
30, 1996.
* denotes a management contract or compensatory plan or arrangement required
to be filed as an exhibit hereto.
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
Dated: August 13, 1996 /s/ Theodore A. Olson
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Theodore A. Olson, Vice President
and Controller (Principal
Accounting Officer)