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, 1997
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) 937-6l00
Indicate by check mark whether the registrant (l) has filed all reports
required to be filed by Section l3 or l5(d) of the Securities Exchange Act of
l934 during the preceding l2 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, 1997, the Corporation had 769,446,683 common shares
without par value outstanding.
PART I 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 SIX MONTHS ENDED
JUNE 30 JUNE 30
----------------------- ------------------------
1997 1996 1997 1996
---------- ---------- ---------- ------------
Net Sales............................. $2,900,408 $2,699,240 $5,900,222 $5,371,417
---------- ---------- ---------- -----------
Cost of products sold................. 1,217,043 1,143,947 2,544,374 2,300,164
Research and development.............. 320,148 304,846 600,222 573,462
Selling, general and administrative... 651,005 598,866 1,307,601 1,171,212
---------- ---------- ---------- ------------
Total Operating Cost and Expenses... 2,188,196 2,047,659 4,452,197 4,044,838
---------- ---------- ---------- ------------
Operating Earnings.................... 712,212 651,581 1,448,025 1,326,579
---------- ---------- ---------- ------------
Interest expense...................... 31,388 22,228 64,142 39,835
Interest income....................... (11,668) (10,186) (23,391) (20,676)
Other (income) expense, net........... (47,266) (27,728) (91,102) (40,852)
---------- ---------- ---------- ------------
Earnings Before Taxes................. 739,758 667,267 1,498,376 1,348,272
Taxes on Earnings..................... 218,229 196,844 442,021 397,740
---------- ---------- ---------- ------------
Net Earnings.......................... $ 521,529 $ 470,423 $1,056,355 $ 950,532
---------- ---------- ---------- ------------
---------- ---------- ---------- ------------
Net Earnings Per Common Share......... $.68 $.60 $1.37 $1.21
---------- ---------- ---------- ------------
---------- ---------- ---------- ------------
Cash Dividends Declared
Per Common Share.................... $.27 $.24 $.54 $.48
---------- ---------- ---------- ------------
---------- ---------- ---------- ------------
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
1997 1996
----------- ------------
(unaudited)
ASSETS
Current Assets:
Cash and cash equivalents................................... $ 126,521 $ 110,209
Investment securities....................................... 18,669 12,875
Trade Receivables, less allowances of $163,245 in 1997
and $153,424 in 1996....................................... 1,728,669 1,708,807
Inventories:
Finished products.......................................... 622,712 627,449
Work in process............................................ 282,346 269,443
Materials.................................................. 358,928 341,313
----------- -----------
Total Inventories......................................... 1,263,986 1,238,205
Prepaid expenses, income taxes, and other receivables 1,450,087 1,410,806
----------- -----------
Total Current Assets...................................... 4,587,932 4,480,902
----------- -----------
Investment Securities Maturing after One Year................. 640,454 665,553
----------- -----------
Property and Equipment, at Cost............................... 8,568,669 8,370,283
Less: accumulated depreciation and amortization............. 4,067,168 3,908,740
----------- -----------
Net Property and Equipment................................ 4,501,501 4,461,543
Deferred Charges, Intangible and Other Assets 1,703,639 1,517,602
----------- -----------
$11,433,526 $11,125,600
----------- -----------
----------- -----------
LIABILITIES AND SHAREHOLDERS' INVESTMENT
Current Liabilities:
Short-term borrowings and current portion of long-term debt $ 1,462,764 $ 1,383,727
Trade accounts payable....................................... 911,436 923,018
Salaries, income taxes, dividends payable, and other accruals 2,139,558 2,036,972
----------- -----------
Total Current Liabilities.................................. 4,513,758 4,343,717
----------- -----------
Long-Term Debt................................................. 931,055 932,898
----------- -----------
Other Liabilities and Deferrals................................ 1,051,543 1,028,803
----------- -----------
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: 1997: 779,555,941; 1996: 784,037,858............... 783,063 694,380
Earnings employed in the business.............................. 4,418,199 4,262,804
Cumulative translation adjustments............................. (186,866) (78,770)
----------- -----------
5,014,396 4,878,414
Less:
Common shares held in treasury, at cost -
Shares: 1997: 9,150,902; 1996: 9,588,632................... 48,295 50,605
Unearned compensation - restricted stock awards................ 28,931 7,627
----------- -----------
Total Shareholders' Investment........................... 4,937,170 4,820,182
----------- -----------
$11,433,526 $11,125,600
----------- ------------
----------- ------------
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
------------------------------
1997 1996
---------- ---------
Cash Flow From (Used in) Operating Activities:
Net earnings............................................ $1,056,355 $ 950,532
Adjustments to reconcile net earnings to
net cash from operating activities -
Depreciation and amortization........................... 348,436 319,262
Trade receivables....................................... (95,310) (88,477)
Inventories............................................. (43,568) (83,521)
Other, net.............................................. 97,993 81,214
----------- -----------
Net Cash From Operating Activities.................... 1,363,906 1,179,010
----------- -----------
Cash Flow From (Used in) Investing Activities:
Acquisition of Sanofi's parenteral products
businesses in 1997, and MediSense in 1996,
net of cash acquired................................... (200,394) (806,738)
Acquisitions of property and equipment ................. (436,325) (460,908)
Investment securities transactions...................... 19,380 (50,757)
Other................................................... 11,363 13,787
----------- -----------
Net Cash (Used in) Investing Activities............... (605,976) (1,304,616)
----------- -----------
Cash Flow From (Used in) Financing Activities:
Borrowing transactions.................................. 84,886 620,517
Common share transactions............................... (421,409) (305,876)
Dividends paid.......................................... (394,671) (353,899)
----------- -----------
Net Cash (Used in) Financing Activities............... (731,194) (39,258)
----------- -----------
Effect of exchange rate changes on cash and
cash equivalents........................................ (10,424) (4,851)
----------- -----------
Net Increase/(Decrease) in Cash and Cash Equivalents..... 16,312 (169,715)
Cash and Cash Equivalents, Beginning of Year............. 110,209 281,197
----------- -----------
Cash and Cash Equivalents, End of Period................. $ 126,521 $ 111,482
----------- -----------
----------- -----------
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, 1997
(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, 1996.
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 773,105,000 for
the six months ended June 30, 1997 and 784,547,000 for the same period in
1996. The Financial Accounting Standards Board issued Statement of Financial
Accounting Standards No. 128 "Earnings per Share" in February 1997. The
Company will adopt the Standard beginning with the year ended 1997. The
adoption of this standard will not have a material effect on the Company's
reported earnings per share.
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, 1997
(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 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:
On April 29, 1997, the Company acquired certain parenteral products
businesses of Sanofi Pharmaceuticals, Inc., for approximately $200 million. A
substantial portion of the purchase price was allocated to intangible assets,
including goodwill, which will be amortized on a straight-line basis over 15
years. Had this acquisition taken place on January 1, 1996, consolidated
sales and net income would not have been significantly different from
reported amounts.
In May 1996, the Company acquired all of the outstanding shares of MediSense,
Inc., a manufacturer of blood glucose self-testing products, for
approximately $867 million in cash. A substantial portion of the purchase
price was allocated to intangible assets which are being amortized over 25 to
40 years.
6
FINANCIAL REVIEW
RESULTS OF OPERATIONS - SECOND QUARTER AND FIRST SIX MONTHS 1997 COMPARED WITH
SAME PERIODS IN 1996
Worldwide sales for the second quarter and first six months increased 7.5
percent and 9.8 percent, respectively, over the comparable 1996 periods. Net
earnings increased 10.9 percent and 11.1 percent, respectively, in the second
quarter and first six months 1997. Earnings per share increased 13.3 percent
and 13.2 percent, respectively, over the prior year periods.
Gross profit margin (sales less cost of products sold, including freight and
distribution expenses) was 58.0 percent for the 1997 second quarter, compared
to 57.6 percent for the 1996 second quarter. This increase is due primarily
to productivity and cost improvements. First half gross margin was 56.9
percent, compared to 57.2 percent a year earlier. Higher royalties, project
expense, and the effect of the relatively stronger U. S. dollar had a
negative effect on gross profit margins for both periods.
Research and development expenses were $320.1 million and $600.2 million for
the second quarter and first six months 1997, respectively. Research and
development represented 11.0 percent and 10.2 percent of net sales, compared
to 11.3 percent and 10.7 percent in 1996. 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 1997 increased 8.7 percent and 11.6 percent, respectively, over
the comparable prior year periods. The increases reflect additional selling
and marketing support for new and existing products, primarily for
pharmaceutical and nutritional products, and due to the acquisition of
MediSense in the second quarter of 1996.
Other (income) expense, net, includes a net foreign exchange loss of $4.0
million for the second quarter and gain of $6.8 million for the first six
months 1997 compared with net foreign exchange losses of $3.8 million and
$13.2 million for the corresponding prior year periods.
7
FINANCIAL REVIEW
(Continued)
INDUSTRY SEGMENTS
Industry segment sales for the second quarter and first six months 1997 and
the related change from the comparable 1996 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 consumers, 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 second quarter and first six months
1997 primarily reflect unit growth. International sales were unfavorably
affected 7.2 percent by the relatively stronger dollar in the second quarter.
On a year-to-date basis, international sales were unfavorably affected 6.4
percent by the relatively stronger U.S. dollar.
Second Quarter Six Months
- ----------------------------------------------------------------------------------------
SEGMENT SALES 1997 Percent 1997 Percent
(in millions of dollars) Sales Change Sales Change
- ---------------------------------------------------------------------------------------
Pharmaceutical and Nutritional Products:
Domestic $1,088.7 9.4 $2,288.2 12.4
- ---------------------------------------------------------------------------------------
International 586.8 9.5 1,213.6 10.8
- ---------------------------------------------------------------------------------------
1,675.5 9.4 3,501.8 11.9
Hospital and Laboratory Products:
Domestic 680.8 9.8 1,332.5 11.5
- ---------------------------------------------------------------------------------------
International 544.1 (0.7) 1,065.9 1.9
- ---------------------------------------------------------------------------------------
1,224.9 4.9 2,398.4 7.0
Total All Segments:
Domestic 1,769.5 9.5 3,620.7 12.1
- ---------------------------------------------------------------------------------------
International 1,130.9 4.3 2,279.5 6.5
- ---------------------------------------------------------------------------------------
$2,900.4 7.5 $5,900.2 9.8
- ---------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------
8
FINANCIAL REVIEW
(continued)
LIQUIDITY AND CAPITAL RESOURCES AT JUNE 30, 1997
COMPARED WITH DECEMBER 31, 1996
- -------------------------------------------------
Net cash from operating activities for the first six months 1997 totaled
$1.364 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 Sanofi
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, 1997. These lines of credit back up
domestic commercial paper borrowing arrangements.
During the first six months 1997, the Company continued its program to
purchase its common shares. The Company purchased and retired 8,027,000
shares during this period at a cost of $489 million. As of June 30, 1997, an
additional 7,638,000 shares may be purchased in future periods under
authorization granted by the Board of Directors in October 1996.
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, 1997,
described 5 antitrust suits and 5 investigations (as of April 29, 1997) that
had been brought in connection with the Company's marketing and sale of
infant formula products. The Company has previously reported that it has
entered into a settlement agreement with plaintiffs involving the 3 cases
pending in Alabama, Louisiana and Nevada and that the settlement was subject
to approval by the individual state courts. On May 30, 1997, the Nevada
Court gave its final approval. The Alabama court has not yet given its final
approval. The Louisiana court has denied final approval and that case will
proceed. An infant formula case is also pending in state court in St. Louis,
Missouri. It purports to be a statewide consumer class action. The case
seeks treble damages, civil penalties, injunctive and other relief. Another
infant formula antitrust case is pending in U.S. District Court in
Massachusetts. It also purports to be a statewide consumer class action. An
agreement has been reached to resolve this case for $1.5 million. This
agreement is subject to court approval. As of June 30, 1997, 4 antitrust
suits and 5 investigations are pending in connection with the Company's sale
and marketing of infant formula products.
The Company's 10-Q for the fiscal quarter ended March 31, 1997,
described 144 antitrust suits and two investigations (as of March 31, 1997)
in connection with the Company's pricing of prescription pharmaceuticals.
Two additional cases have been filed. One case was filed on March 14, 1997,
in state court in Prentiss County, Mississippi. The Company was notified of
its filing in June, 1997. The other was filed on June 27, 1997, in state
court in Mecklenburg County, North Carolina. In addition, the case pending
in Davidson County, Tennessee was removed to the U.S. District Court. As of
July 28, 1997, 122 prescription pharmaceutical pricing antitrust cases were
pending in federal court, 23 were pending in various state courts, and 1 was
pending in a District of Columbia court. The prescription pharmaceutical
pricing antitrust suits allege that various pharmaceutical manufacturers have
conspired to fix prices for prescription pharmaceuticals and/or to
discriminate in pricing to retail pharmacies by providing discounts to
mail-order pharmacies, institutional pharmacies and HMOs in violation of
state and federal antitrust laws. The suits have been brought on behalf of
individuals and retail pharmacies and name both the Company and certain other
pharmaceutical manufacturers and pharmaceutical wholesalers and at least one
mail-order pharmacy company as defendants. The cases seek treble damages,
civil penalties, injunctive and other relief. The Company has filed or
intends to file a response to each of the complaints denying all substantive
allegations. The federal cases are pending in the United States District
Court for the Northern District of Illinois under the Multidistrict
Litigation Rules as IN RE: BRAND NAME PRESCRIPTION DRUG ANTITRUST
LITIGATION, MDL 997. One of the cases pending in the MDL 997 litigation has
been certified as a class action on behalf of certain retail pharmacies. The
cases pending in California and the District of Columbia have also been
certified as class actions. A number of appeals to the Seventh Circuit Court
of Appeals have been filed arising out of the MDL 997 litigation. All
litigation in the U.S. District Court for the Northern District of Illinois
is stayed pending the resolution of these appeals.
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.
10
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
10.1 Abbott Laboratories 1986 Management Incentive Plan
amended April 25, 1997 - 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
None
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: August 12, 1997 /s/ Theodore A. Olson
----------------------------------
Theodore A. Olson, Vice President
and Controller (Principal
Accounting Officer)
11