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, 1998
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 April 30, 1998, the Corporation had 771,789,413 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 AND SHARES IN THOUSANDS EXCEPT PER SHARE DATA)
THREE MONTHS ENDED MARCH 31
---------------------------
1998 1997
---------- ----------
Net Sales..................................... $3,044,913 $2,999,814
--------- ---------
Cost of products sold......................... 1,279,973 1,327,331
Research and development...................... 279,876 280,074
Selling, general and administrative........... 682,175 656,596
--------- ---------
Total Operating Cost and Expenses........... 2,242,024 2,264,001
--------- ---------
Operating Earnings............................ 802,889 735,813
--------- ---------
Interest expense.............................. 37,960 32,754
Interest income............................... (12,914) (11,723)
Other (income) expense, net................... (41,036) (43,836)
--------- ---------
Earnings Before Taxes......................... 818,879 758,618
Taxes on Earnings............................. 229,286 223,792
--------- ---------
Net Earnings.................................. $ 589,593 $ 534,826
--------- ---------
--------- ---------
Basic Earnings Per Common Share............... $.77 $.69
--------- ---------
--------- ---------
Diluted Earnings Per Common Share............. $.76 $.68
--------- ---------
--------- ---------
Cash Dividends Declared
Per Common Share............................ $.30 $.27
--------- ---------
--------- ---------
Average Number of Common Shares Outstanding
Used for Basic Earnings Per Common Share... 764,004 773,983
Dilutive Common Stock Options................. 10,541 10,640
--------- ---------
Average Number of Common Shares Outstanding
Plus Dilutive Common Stock Options.......... 774,545 784,623
--------- ---------
--------- ---------
Outstanding Employee Common Stock Options
Having No Dilutive Effect.................. 6,734 5,937
--------- ---------
--------- ---------
The accompanying notes to condensed consolidated financial statements are an
integral part of this statement.
ABBOTT LABORATORIES AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEET
(DOLLARS IN THOUSANDS)
MARCH 31 DECEMBER 31
1998 1997
----------- -----------
(UNAUDITED)
ASSETS
Current Assets:
Cash and cash equivalents........................ $ 225,544 $ 230,024
Investment securities............................ 69,401 28,986
Trade Receivables, less allowances
of $183,677 in 1998 and $167,406 in 1997......... 1,701,232 1,782,326
Inventories:
Finished products.............................. 698,925 667,355
Work in process................................ 320,245 287,653
Materials...................................... 325,021 324,892
----------- -----------
Total Inventories........................... 1,344,191 1,279,900
Prepaid expenses, income taxes, and
other receivables............................. 1,841,436 1,716,972
----------- -----------
Total Current Assets........................ 5,181,804 5,038,208
----------- -----------
Investment Securities Maturing after One Year..... 573,701 630,967
----------- -----------
Property and Equipment, at Cost................... 8,899,831 8,790,157
Less: accumulated depreciation and amortization... 4,313,956 4,220,466
----------- -----------
Net Property and Equipment...................... 4,585,875 4,569,691
Deferred Charges, Intangible and Other Assets..... 1,773,722 1,822,202
----------- -----------
$12,115,102 $12,061,068
----------- -----------
----------- -----------
LIABILITIES AND SHAREHOLDERS' INVESTMENT
Current Liabilities:
Short-term borrowings and current portion
of long-term debt................................ $ 1,290,488 $ 1,781,352
Trade accounts payable........................... 942,589 1,001,058
Salaries, income taxes, dividends payable, and
other accruals................................. 2,493,498 2,252,058
----------- -----------
Total Current Liabilities................... 4,726,575 5,034,468
----------- -----------
Long-Term Debt.................................... 1,139,720 937,983
----------- -----------
Other Liabilities and Deferrals................... 1,107,095 1,089,940
----------- -----------
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: 1998: 772,226,694;
1997: 773,234,252.................... 997,593 907,106
Earnings employed in the business................. 4,507,409 4,395,582
Accumulated other comprehensive income............ (276,042) (230,241)
----------- -----------
5,228,960 5,072,447
Less:
Common shares held in treasury, at cost -
Shares: 1998: 8,871,199; 1997: 9,140,199......... 46,818 48,238
Unearned compensation - restricted stock awards... 40,430 25,532
----------- -----------
Total Shareholders' Investment.............. 5,141,712 4,998,677
----------- -----------
$12,115,102 $12,061,068
----------- -----------
----------- -----------
The accompanying notes to condensed consolidated financial statements are an
integral part of this statement.
ABBOTT LABORATORIES AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(UNAUDITED)
(DOLLARS IN THOUSANDS)
THREE MONTHS ENDED MARCH 31
---------------------------
1998 1997
---- ----
Cash Flow From (Used in) Operating Activities:
Net earnings....................................... $ 589,593 $ 534,826
Adjustments to reconcile net earnings to
net cash from operating activities -
Depreciation and amortization...................... 190,585 176,076
Trade Receivables.................................. 50,467 (93,688)
Inventories........................................ (86,212) 4,445
Other, Net......................................... 136,950 162,967
----------- ---------
Net Cash From Operating Activities............ 881,383 784,626
----------- ---------
Cash Flow From (Used in) Investing Activities:
Acquisitions of property, equipment and businesses (238,447) (220,069)
Investment Securities Transactions................. 16,778 15,394
Other.............................................. 4,388 5,857
----------- ---------
Net Cash (Used in) Investing Activities....... (217,281) (198,818)
----------- ---------
Cash Flow From (Used in) Financing Activities:
Borrowing transactions............................. (286,763) (175,842)
Common share transactions.......................... (171,709) (189,608)
Dividends paid..................................... (206,343) (185,905)
----------- ---------
Net Cash (Used in) Financing Activities....... (664,815) (551,355)
----------- ---------
Effect of exchange rate changes on cash and
cash equivalents................................... ( 3,767) (10,569)
----------- ---------
Net Increase (Decrease) in Cash and Cash Equivalents... (4,480) 23,884
Cash and Cash Equivalents, Beginning of Year........... 230,024 110,209
----------- ---------
Cash and Cash Equivalents, End of Period............... $ 225,544 $ 134,093
----------- ---------
----------- ---------
The accompanying notes to condensed consolidated financial statements are an
integral part of this statement.
ABBOTT LABORATORIES AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1998
(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, 1997.
NOTE 2 - 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.
NOTE 3 - 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 and
state remediation laws and is investigating potential contamination at a
number of Company-owned locations.
The matters above are discussed more fully in Note 10 to the financial
statements included in the Company's Annual Report on Form 10-K, which is
available upon request.
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 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.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1998
(UNAUDITED), CONTINUED
NOTE 4 - ACQUISITIONS:
On April 17, 1998, the Company acquired International Murex Technologies
Corporation for approximately $234 million in cash. Had this acquisition
taken place on January 1, 1997, consolidated sales and net income would not
have been significantly different from reported amounts.
NOTE 5 - COMPREHENSIVE INCOME:
THREE MONTHS ENDED MARCH 31
---------------------------
1998 1997
---------- ---------
Net Earnings $ 589,593 $ 534,826
---------- ---------
Other comprehensive income:
Foreign currency translation adjustments (45,595) (99,579)
Unrealized losses on marketable equity
securities (343) (4,704)
Tax benefit related to items of
other comprehensive income 137 1,882
---------- ---------
Other comprehensive income, net of tax (45,801) (102,401)
---------- ---------
Comprehensive Income 543,792 432,425
---------- ---------
---------- ---------
As of March 31, 1998, the cumulative balances for foreign currency translation
adjustments and the unrealized (gain) on marketable equity securities were $308
million and ($32) million, respectively.
NOTE 6 - ADOPTION OF STATEMENT OF POSITION
In the first quarter, 1998, the Company elected early adoption of the provisions
of the American Institution of Certified Public Accountants' Statement of
Position 98-1, "Accounting for the Costs of Computer Software Developed or
Obtained for Internal Use." Adoption of the provisions of this statement will
not have a material effect on the financial statements of the Company.
NOTE 7 - STOCK SPLIT:
On February 13, 1998, the Company announced a two-for-one stock split.
Shareholders of record at the close of business on May 1, 1998 will be issued an
additional share of the Company's common stock on May 29, 1998 for each share
owned on the record date. The number of shares and the per share amounts
included in the March 31, 1998 and December 31, 1997 condensed consolidated
financial statements have not been restated for the stock split.
FINANCIAL REVIEW
RESULTS OF OPERATIONS - FIRST QUARTER 1998 COMPARED WITH FIRST QUARTER 1997
Worldwide sales for the first quarter increased 1.5 percent to $3.045 billion
from $3.000 billion in 1997. Excluding the negative effect of the
relatively stronger U.S. dollar, sales increased 5.1 percent in the first
quarter 1998 compared to 1997. Net earnings increased 10.2 percent over the
prior year quarter. Basic earnings per common share and diluted earnings per
common share increased 11.6 percent and 11.8 percent, respectively, over the
prior year.
Gross profit margin (sales less cost of products sold, including freight and
distribution expenses) of 58.0 percent for the first quarter was up from 55.8
percent one year ago. This increase was primarily due to productivity
improvements and cost savings, partially offset by unfavorable product mix,
primarily slower sales of pharmaceuticals.
Research and development expenses were $279.9 million in the first quarter
1998. This represented 9.2 percent of net sales, compared to 9.3 percent in
1997. 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 increased
3.9 percent from the prior year, net of the favorable effect of the
relatively stronger U.S. dollar of 3.9%. This net increase reflects
inflation and additional selling and marketing support for new and existing
products, primarily for pharmaceutical and nutritional products.
Other (income) expense, net, includes net foreign exchange losses of $7.4
million in the 1998 first quarter, compared with net foreign exchange gains
of $10.9 million in the same quarter last year.
FINANCIAL REVIEW
(CONTINUED)
INDUSTRY SEGMENTS
Industry segment sales for the first quarter 1998 and the related change from
the comparable 1997 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
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 first quarter primarily reflect unit
growth. Total sales were unfavorably affected 3.6 percent and international
sales were unfavorably affected 9.5 percent by the relatively stronger U. S.
dollar in the first quarter.
FIRST QUARTER
-------------
SEGMENT SALES 1998 PERCENT
(in millions of dollars) SALES INCREASE
- ----------------------------------------------------------------------------
Pharmaceutical and Nutritional Products:
Domestic $1,200.1 0.1
- ----------------------------------------------------------------------------
International 606.9 (3.2)
- ----------------------------------------------------------------------------
1,807.0 (1.1)
Hospital and Laboratory Products:
Domestic 736.4 13.0
- ----------------------------------------------------------------------------
International 501.5 (3.9)
- ----------------------------------------------------------------------------
1,237.9 5.5
Total All Segments:
Domestic 1,936.5 4.6
- ----------------------------------------------------------------------------
International 1,108.4 (3.5)
- ----------------------------------------------------------------------------
$3,044.9 1.5
- ----------------------------------------------------------------------------
- ----------------------------------------------------------------------------
FINANCIAL REVIEW
(CONTINUED)
LIQUIDITY AND CAPITAL RESOURCES AT MARCH 31, 1998
COMPARED WITH DECEMBER 31, 1997
Net cash from operating activities for the first quarter 1998 totaled $881
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 funded the acquisition of Murex 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 March 31, 1998. These lines of credit support
domestic commercial paper borrowing arrangements.
In the first quarter 1998, the Company issued $200 million of debt securities
under a registration statement filed with the Securities and Exchange Commission
in June 1996. The Company may issue up to an additional $200 million under this
registration statement.
During the first quarter 1998, the Company continued its program to purchase its
common shares. The Company purchased and retired 2,688,000 shares during this
period at a cost of $199 million. As of March 31, 1998, an additional
11,012,000 shares may be purchased in future periods under authorization granted
by the Board of Directors in December 1997.
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.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company's 10-K for the fiscal year ended December 31, 1997
described two antitrust suits and five investigations (as of January 31,
1998) in connection with the Company's sale and marketing of infant formula
products. During the first quarter of 1998, the court denied the Company's
motion to dismiss the case pending in state court in St. Louis, Missouri.
As reported in the Company's 10-K for the fiscal year ended
December 31, 1997, the Company is involved in numerous antitrust suits and
two investigations regarding the Company's pricing of pharmaceutical
products. As of March 31, 1998, 120 federal cases are pending in the United
States District Court for the Northern District of Illinois as In re: Brand
Name Prescription Drug Antitrust Litigation, MDL 997. Four cases previously
pending in federal court were remanded to state court. Numerous appeals have
arisen out of the case pending in the MDL 997 litigation which has been
certified as a class action on behalf of certain retail pharmacies. The
petition of the Company (along with other defendants) for certiorari to the
United States Supreme Court seeking a reversal of the Court of Appeals'
rulings on certain issues was denied on March 23, 1998. The federal retail
pharmacy class action trial is scheduled to begin in September 1998.
As of March 31, 1998, there were 25 cases pending in state court
and one case pending in a District of Columbia court. As noted above, the
following four cases were remanded to state court by the federal court in the
MDL 997 litigations: Clark County, Alabama, Dade County, Florida, Johnson
County, Kansas, and Davidson County, Tennessee. The Company has entered
into settlement agreements to settle the retail pharmacy lawsuits in
Washington County, Wisconsin and one of the suits in Hennepin County,
Minnesota. The settlement agreement in the Minnesota lawsuit was approved on
December 30, 1997. The settlement agreement in the Wisconsin lawsuit was
approved on February 16, 1998. Under the settlement agreements, the Company
did not admit liability but did pay $42,767.32 in connection with the
Minnesota lawsuit and $147,877.78 in connection with the Wisconsin lawsuit.
Motions for certification as a consumer class action were denied in Maine,
Michigan, and Minnesota. Appeals of the consumer class certification
decisions are pending in Maine and Michigan. Trial in the individual
consumer case pending in Michigan is scheduled for July 1998.
The Company's 10-K for the fiscal year ended December 31, 1997
described five cases (as of January 31, 1998) involving the Company's patents
for terazosin hydrochloride, a drug the Company sells under the trademark
Hytrin-Registered Trademark-. On March 31, 1998, the Company and Zenith
reached an agreement that resolved the litigation between the parties. In
the settlement, Zenith acknowledged the validity of Abbott's terazosin
hydrochloride patents and agreed to refrain from selling a generic version of
terazosin hydrochloride until the expiration of one of Abbott's patents for
terazosin hydrochloride (patent No. 4,251,532). On April 1, 1998, the
Company and Geneva reached an agreement under which Geneva will not market
its Food and Drug Administration approved generic terazosin hydrochloride
capsules until resolution of the pending litigation between the parties. The
Company agreed to make quarterly payments to Zenith and Geneva until the date
on which they may enter the market for terazosin hydrochloride under their
agreements. Both Zenith and Geneva would be free to enter the market for
terazosin hydrochloride in the United States if certain of the Company's
patents for terazosin hydrochloride were determined to be invalid or if
another company legally enters the generic market in the United States. On
April 6, 1998, the Company sued Warner Chilcott, Inc. ("Warner") alleging
infringement of one of the Company's patents for terazosin hydrochloride.
Warner filed counterclaims alleging, among other things that the Company's
agreements with Zenith and Geneva and its course of conduct with respect to
terazosin hydrochloride violate the Antitrust laws. Warner seeks unspecified
damages.
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 to a Vote of Security Holders
The Company held its Annual Meeting of Shareholders on April
24, 1998. 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. 644,878,769 8,534,278
Duane L. Burnham 649,189,909 4,223,138
Paul N. Clark 649,229,974 4,183,073
H. Laurance Fuller 646,543,750 6,869,297
Thomas R. Hodgson 649,236,127 4,176,920
David A. Jones 648,672,816 4,740,231
The Lord Owen CH 649,117,785 4,295,262
Robert L. Parkinson, Jr. 649,186,045 4,227,002
Boone Powell, Jr. 646,617,575 6,795,472
Addison Barry Rand 646,540,057 6,872,990
W. Ann Reynolds, Ph.D. 648,864,446 4,548,601
Roy S. Roberts 648,949,509 4,463,538
William D. Smithburg 645,922,563 7,490,484
John R. Walter 648,186,179 5,226,868
William L. Weiss 646,289,205 7,123,842
Miles D. White 649,259,002 4,154,045
(b) The shareholders approved the adoption of the 1998 Abbott
Laboratories Performance Incentive Plan. The number of shares cast in favor of
the approval of the 1998 Abbott Laboratories Performance Incentive Plan, the
number against, and the number abstaining were as follows:
For Against Abstain
----------- ---------- ---------
606,116,758 41,787,264 5,509,025
(c) The shareholders ratified the appointment of Arthur Andersen
LLP as auditors of the Company. The number of shares cast in favor of the
ratification of Arthur Andersen LLP, the number against, and the number
abstaining were as follows:
For Against Abstain
----------- ---------- ---------
649,678,052 2,159,959 1,575,036
(d) The shareholders rejected a shareholder proposal that the
Company adopt the CERES Principles. The number of shares cast in favor of the
shareholder proposal, the number against, the number abstaining, and the number
of broker non-votes were as follows:
For Against Abstain Broker Non-Vote
---------- ----------- ---------- ----------------
43,508,171 491,955,075 33,871,791 84,078,010
Item 6. Exhibits and Reports on Form 8-K
a) Exhibits
3.1 Articles of Incorporation of Abbott Laboratories, as
amended and effective May 1, 1998 - attached hereto.
3.2 Amendment to Articles of Incorporation of Abbott
Laboratories - attached hereto.
3.3 By-Laws of Abbott Laboratories, as amended and
effective April 24, 1998 - attached hereto.
10.1 1998 Abbott Laboratories Incentive Performance 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.
* Denotes management contract or compensatory plan or
arrangement required to be filed as an exhibit hereto.
b) Reports on Form 8-K
None
SIGNATURE
Pursuant to the requirements of the Securities and 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
/s/ Theodore A. Olson
-----------------------------------
Date: May 14, 1998 Theodore A. Olson, Vice President
and Controller (Principal Accounting
Officer)