Exhibit 13
The portions of the Abbott Laboratories Annual Report for the year ended
December 31, 1998 captioned Consolidated Statement of Earnings, Consolidated
Statement of Cash Flows, Consolidated Balance Sheet, Consolidated Statement of
Shareholders' Investment, Notes to Consolidated Financial Statements, Report of
Independent Public Accountants, Financial Instruments and Risk Management,
Financial Review, and the applicable portions of the section captioned Summary
of Financial Data for the years 1994 through 1998.
Abbott Laboratories and Subsidiaries
CONSOLIDATED STATEMENT OF EARNINGS
(dollars and shares in thousands except per share data)
Year Ended December 31
-----------------------------------------
1998 1997 1996
----------- ----------- -----------
Net Sales. . . . . . . . . . . . . . . . . . . . . $12,477,845 $11,883,462 $11,013,460
----------- ----------- -----------
Cost of products sold. . . . . . . . . . . . . . . 5,394,441 5,045,678 4,731,998
Research and development . . . . . . . . . . . . . 1,221,593 1,302,403 1,204,841
Selling, general and administrative. . . . . . . . 2,743,888 2,684,955 2,459,560
----------- ----------- -----------
Total Operating Cost and Expenses . . . . . . . 9,359,922 9,033,036 8,396,399
----------- ----------- -----------
Operating Earnings . . . . . . . . . . . . . . . . 3,117,923 2,850,426 2,617,061
Net interest expense . . . . . . . . . . . . . . . 104,118 86,802 50,924
Income from TAP Holdings Inc. joint venture . . . (266,347) (189,497) (129,717)
Net foreign exchange (gain) loss . . . . . . . . . 31,158 (9,048) 21,827
Other (income) expense, net. . . . . . . . . . . . 8,395 12,223 4,477
----------- ----------- -----------
Earnings Before Taxes . . . . . . . . . . . . . 3,240,599 2,949,946 2,669,550
Taxes on earnings. . . . . . . . . . . . . . . . . 907,368 855,484 787,517
----------- ----------- -----------
Net Earnings . . . . . . . . . . . . . . . . . . . $ 2,333,231 $ 2,094,462 $ 1,882,033
----------- ----------- -----------
----------- ----------- -----------
Basic Earnings Per Common Share. . . . . . . . . . $1.53 $1.36 $1.20
----------- ----------- -----------
----------- ----------- -----------
Diluted Earnings Per Common Share. . . . . . . . . $1.51 $1.34 $1.19
----------- ----------- -----------
----------- ----------- -----------
Average Number of Common Shares Outstanding
Used for Basic Earnings Per Common Share. . . . 1,522,702 1,539,746 1,562,494
Dilutive Common Stock Options . . . . . . . . . 22,956 21,716 18,098
----------- ----------- -----------
Average Number of Common Shares Outstanding
Plus Dilutive Common Stock Options. . . . . . . 1,545,658 1,561,462 1,580,592
----------- ----------- -----------
----------- ----------- -----------
Outstanding Common Stock Options
Having No Dilutive Effect . . . . . . . . . . . 657 2,216 600
----------- ----------- -----------
----------- ----------- -----------
The accompanying notes to consolidated financial statements are an integral part
of this statement.
Abbott Laboratories and Subsidiaries
CONSOLIDATED STATEMENT OF CASH FLOWS
(dollars in thousands)
Year Ended December 31
----------------------------------------
1998 1997 1996
---------- ---------- ----------
Cash Flow From (Used in) Operating Activities:
Net earnings . . . . . . . . . . . . . . . . . . . . . . . . . $2,333,231 $2,094,462 $1,882,033
Adjustments to reconcile net earnings to
net cash from operating activities -
Depreciation and amortization. . . . . . . . . . . . . . . . . 784,243 727,754 686,085
Exchange (gains) losses, net . . . . . . . . . . . . . . . . . (14,176) 31,005 (3,419)
Investing and financing (gains) losses, net. . . . . . . . . . 90,798 113,999 57,224
Trade receivables. . . . . . . . . . . . . . . . . . . . . . . (143,470) (222,427) (163,621)
Inventories. . . . . . . . . . . . . . . . . . . . . . . . . . (111,649) (98,964) (125,726)
Prepaid expenses and other assets. . . . . . . . . . . . . . . (239,533) (491,769) (303,766)
Trade accounts payable and other liabilities . . . . . . . . . 178,979 485,407 342,407
Income taxes payable . . . . . . . . . . . . . . . . . . . . . (145,522) (10,700) 10,845
---------- ---------- ----------
Net Cash From Operating Activities . . . . . . . . . . . . . 2,732,901 2,628,767 2,382,062
---------- ---------- ----------
Cash Flow From (Used in) Investing Activities:
Acquisition of International Murex in 1998, Sanofi's parenteral
products businesses in 1997, and MediSense in 1996,
net of cash acquired. . . . . . . . . . . . . . . . . . . (249,177) (200,475) (830,559)
Acquisitions of property, equipment and other businesses . . . (990,619) (1,007,296) (949,028)
Purchases of investment securities . . . . . . . . . . . . . . (278,002) (25,115) (312,535)
Proceeds from sales of investment securities . . . . . . . . . 78,898 43,424 117,783
Other. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18,034 (8,209) 19,098
---------- ---------- ----------
Net Cash Used in Investing Activities. . . . . . . . . . . . (1,420,866) (1,197,671) (1,955,241)
---------- ---------- ----------
Cash Flow From (Used in) Financing Activities:
Proceeds from (repayments of) commercial paper, net. . . . . . 42,000 402,000 317,000
Proceeds from issuance of long-term debt . . . . . . . . . . . 400,000 - 500,000
Other borrowing transactions, net. . . . . . . . . . . . . . . (59,499) 16,085 18,037
Purchases of common shares . . . . . . . . . . . . . . . . . . (875,407) (1,054,512) (808,816)
Proceeds from stock options exercised. . . . . . . . . . . . . 150,881 137,482 109,638
Dividends paid . . . . . . . . . . . . . . . . . . . . . . . . (891,661) (809,554) (728,147)
---------- ---------- ----------
Net Cash Used in Financing Activities. . . . . . . . . . . . (1,233,686) (1,308,499) (592,288)
---------- ---------- ----------
Abbott Laboratories and Subsidiaries
CONSOLIDATED STATEMENT OF CASH FLOWS (CONTINUED)
(dollars in thousands)
Year Ended December 31
----------------------------------------
1998 1997 1996
---------- --------- ---------
Effect of exchange rate changes on cash and
cash equivalents . . . . . . . . . . . . . . . . (143) (2,782) (5,521)
---------- --------- ---------
Net Increase (Decrease) in Cash and Cash Equivalents 78,206 119,815 (170,988)
Cash and Cash Equivalents, Beginning of Year . . . 230,024 110,209 281,197
--------- --------- ---------
Cash and Cash Equivalents, End of Year . . . . . . $ 308,230 $ 230,024 $ 110,209
---------- --------- ---------
---------- --------- ---------
Supplemental Cash Flow Information:
Income taxes paid. . . . . . . . . . . . . . . . $1,060,479 $ 922,242 $ 801,107
Interest paid. . . . . . . . . . . . . . . . . . 153,875 132,645 89,509
The accompanying notes to consolidated financial statements are an integral part
of this statement.
Abbott Laboratories and Subsidiaries
CONSOLIDATED BALANCE SHEET
(dollars in thousands)
ASSETS
December 31
-----------------------------------------
1998 1997 1996
----------- ----------- -----------
Current Assets:
Cash and cash equivalents. . . . . . . . . . . . . . . . . $ 308,230 $ 230,024 $ 110,209
Investment securities. . . . . . . . . . . . . . . . . . . 75,087 28,986 12,875
Trade receivables, less allowances of -
1998: $190,952; 1997: $167,406; 1996: $153,424 . . . . . 1,950,058 1,782,326 1,708,807
Inventories -
Finished products. . . . . . . . . . . . . . . . . . . . 697,494 667,355 627,449
Work in process. . . . . . . . . . . . . . . . . . . . . 345,776 287,653 269,443
Materials. . . . . . . . . . . . . . . . . . . . . . . . 367,339 324,892 341,313
----------- ----------- -----------
Total inventories. . . . . . . . . . . . . . . . . . . 1,410,609 1,279,900 1,238,205
Prepaid income taxes . . . . . . . . . . . . . . . . . . . 847,154 800,591 708,402
Other prepaid expenses and receivables . . . . . . . . . . 961,998 916,381 702,404
----------- ----------- -----------
Total Current Assets. . . . . . . . . . . . . . . . . . 5,553,136 5,038,208 4,480,902
----------- ----------- -----------
Investment Securities Maturing after One Year. . . . . . . . 783,842 630,967 665,553
----------- ----------- -----------
Property and Equipment, at Cost:
Land . . . . . . . . . . . . . . . . . . . . . . . . . . . 165,474 152,791 156,038
Buildings. . . . . . . . . . . . . . . . . . . . . . . . . 1,860,068 1,746,772 1,621,036
Equipment. . . . . . . . . . . . . . . . . . . . . . . . . 7,099,092 6,486,512 6,142,139
Construction in progress . . . . . . . . . . . . . . . . . 271,602 404,082 451,070
----------- ----------- -----------
9,396,236 8,790,157 8,370,283
Less: accumulated depreciation and amortization. . . . . . 4,657,393 4,220,466 3,908,740
----------- ----------- -----------
Net Property and Equipment . . . . . . . . . . . . . . . . 4,738,843 4,569,691 4,461,543
Net Intangible Assets. . . . . . . . . . . . . . . . . . . . 1,349,822 1,112,126 979,793
----------- ----------- -----------
Deferred Charges and Other Assets. . . . . . . . . . . . . . 790,570 710,076 537,809
----------- ----------- -----------
$13,216,213 $12,061,068 $11,125,600
----------- ----------- -----------
----------- ----------- -----------
The accompanying notes to consolidated financial statements are an integral part
of this statement.
Abbott Laboratories and Subsidiaries
CONSOLIDATED BALANCE SHEET
(dollars in thousands)
LIABILITIES AND SHAREHOLDERS' INVESTMENT
December 31
-----------------------------------------
1998 1997 1996
----------- ----------- -----------
Current Liabilities:
Short-term borrowings and current portion of
long-term debt. . . . . . . . . . . . . . . . . . . . $ 1,759,076 $ 1,781,352 $ 1,383,727
Trade accounts payable . . . . . . . . . . . . . . . . . . 1,056,641 1,001,058 923,018
Salaries, wages and commissions. . . . . . . . . . . . . . 374,262 332,914 322,292
Other accrued liabilities. . . . . . . . . . . . . . . . . 1,378,707 1,406,132 1,206,552
Dividends payable. . . . . . . . . . . . . . . . . . . . . 227,400 201,450 185,866
Income taxes payable . . . . . . . . . . . . . . . . . . . 166,040 311,562 322,262
----------- ----------- -----------
Total Current Liabilities . . . . . . . . . . . . . . . 4,962,126 5,034,468 4,343,717
----------- ----------- -----------
Long-Term Debt . . . . . . . . . . . . . . . . . . . . . . . 1,339,694 937,983 932,898
----------- ----------- -----------
Deferred Income Taxes. . . . . . . . . . . . . . . . . . . . 108,964 136,514 153,279
----------- ----------- -----------
Other Liabilities and Deferrals. . . . . . . . . . . . . . . 1,091,768 953,426 875,524
----------- ----------- -----------
Shareholders' Investment:
Preferred shares, one dollar par value
Authorized - 1,000,000 shares, none issued . . . . . . . - - -
Common shares, without par value
Authorized - 2,400,000,000 shares
Issued at stated capital amount -
Shares: 1998: 1,533,774,332; 1997: 1,546,468,504;
1996: 1,568,075,716. . . . . . . . . . . . . . . . . . . 1,231,079 907,106 694,380
Common shares held in treasury, at cost -
Shares: 1998: 17,710,838; 1997: 18,280,398;
1996: 19,177,264 . . . . . . . . . . . . . . . . . . . . (46,735) (48,238) (50,605)
Unearned compensation - restricted stock awards. . . . . . (25,331) (25,532) (7,627)
Earnings and other comprehensive
income employed in the business . . . . . . . . . . . 4,554,648 4,165,341 4,184,034
----------- ----------- -----------
Total Shareholders' Investment . . . . . . . . . . . . . 5,713,661 4,998,677 4,820,182
----------- ----------- -----------
$13,216,213 $12,061,068 $11,125,600
----------- ----------- -----------
----------- ----------- -----------
Abbott Laboratories and Subsidiaries
CONSOLIDATED STATEMENT OF SHAREHOLDERS' INVESTMENT
(dollars in thousands except per share data)
Year Ended December 31
----------------------------------------
1998 1997 1996
---------- ---------- ----------
Common Shares:
Beginning of Year
Shares: 1998: 1,546,468,504; 1997: 1,568,075,716; 1996: 1,594,042,422 . . . . $ 907,106 $ 694,380 $ 581,562
Issued under incentive stock programs
Shares: 1998: 13,641,871; 1997: 15,268,426; 1996: 10,207,402. . . . . . . . . 257,249 177,395 105,648
Tax benefit from option shares and vesting of restricted stock awards
(no share effect) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 85,070 53,866 21,589
Retired - Shares: 1998: 26,336,043; 1997: 36,875,638; 1996: 36,174,108 . . . . (18,346) (18,535) (14,419)
---------- ---------- ----------
End of Year
Shares: 1998: 1,533,774,332; 1997: 1,546,468,504; 1996: 1,568,075,716 . . . . $1,231,079 $ 907,106 $ 694,380
---------- ---------- ----------
---------- ---------- ----------
Common Shares Held in Treasury:
Beginning of Year
Shares: 1998: 18,280,398; 1997: 19,177,264; 1996: 19,428,758. . . . . . . . . $ (48,238) $ (50,605) $ (51,268)
Issued under incentive stock programs
Shares: 1998: 569,560; 1997: 896,866; 1996: 251,494 . . . . . . . . . . . . . 1,503 2,367 663
---------- ---------- ----------
End of Year
Shares: 1998: 17,710,838; 1997: 18,280,398; 1996: 19,177,264. . . . . . . . . $ (46,735) $ (48,238) $ (50,605)
---------- ---------- ----------
---------- ---------- ----------
Unearned Compensation - Restricted Stock Awards:
Beginning of Year. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ (25,532) $ (7,627) $ (4,718)
Issued at market value - Shares: 1998: 554,000; 1997: 888,000; 1996: 237,600 . (20,584) (25,914) (5,881)
Lapses - Shares: 1998: 22,000; 1996: 12,000. . . . . . . . . . . . . . . . . . 705 - 308
Amortization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20,080 8,009 2,664
---------- ---------- ----------
End of Year. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ (25,331) $ (25,532) $ (7,627)
---------- ---------- ----------
---------- ---------- ----------
Earnings and Other Comprehensive Income Employed in the Business:
Beginning of Year. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $4,165,341 $4,184,034 $3,871,271
Comprehensive income:
Net earnings. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,333,231 2,094,462 1,882,033
---------- ---------- ----------
Other comprehensive income (loss):
Foreign currency translation adjustments. . . . . . . . . . . . . . . . . . . 1,504 (183,886) (23,101)
Unrealized gains on marketable equity securities. . . . . . . . . . . . . . . 991 3,025 15,000
Tax benefit (expense) related to items of other comprehensive income. . . . . 45 (1,210) (6,023)
---------- ---------- ----------
Total other comprehensive income (loss), net of tax . . . . . . . . . . . 2,540 (182,071) (14,124)
---------- ---------- ----------
Comprehensive income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,335,771 1,912,391 1,867,909
---------- ---------- ----------
Cash dividends declared on common shares
(per share -1998: $.60; 1997: $.54; 1996: $.48). . . . . . . . . . . . . . . (917,611) (825,138) (748,659)
Cost of common shares retired in excess of stated capital amount . . . . . . . (1,048,500) (1,129,757) (811,996)
Cost of treasury shares issued below market value of restricted stock awards . 19,647 23,811 5,509
---------- ---------- ----------
End of Year. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $4,554,648 $4,165,341 $4,184,034
---------- ---------- ----------
---------- ---------- ----------
Abbott Laboratories and Subsidiaries
CONSOLIDATED STATEMENT OF SHAREHOLDERS' INVESTMENT (CONTINUED)
(dollars in thousands except per share data)
Year Ended December 31
----------------------------------------
1998 1997 1996
---------- ---------- ----------
Supplemental Comprehensive Income Information:
Cumulative foreign currency translation loss adjustments, net of tax $ 260,711 $ 262,656 $ 78,770
Cumulative unrealized (gains) on marketable equity securities, net of tax (33,010) (32,415) (30,600)
The accompanying notes to consolidated financial statements are an integral part
of this statement.
Abbott Laboratories and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1 - Summary of Significant Accounting Policies
NATURE OF BUSINESS AND CONCENTRATION OF RISK - The Company's principal business
is the discovery, development, manufacture and sale of a broad line of health
care products and services. Due to the nature of the Company's operations, it
is not subject to significant concentration risks relating to customers,
products or geographic locations.
BASIS OF CONSOLIDATION - The consolidated financial statements include the
accounts of the parent company and subsidiaries, after elimination of
intercompany transactions. The accounts of foreign subsidiaries are
consolidated as of November 30 due to the time needed to consolidate these
subsidiaries. No events occurred related to these foreign subsidiaries in
December 1998, 1997, and 1996 which materially affected the financial position
or results of operations.
USE OF ESTIMATES - The financial statements have been prepared in accordance
with generally accepted accounting principles and necessarily include amounts
based on estimates and assumptions by management. Actual results could differ
from those amounts. Significant estimates include amounts for litigation,
income taxes, sales rebates and inventory and accounts receivable exposures.
CASH, CASH EQUIVALENTS AND INVESTMENT SECURITIES - Cash equivalents consist of
time deposits and certificates of deposit with original maturities of three
months or less. Investments in marketable equity securities are classified as
available-for-sale and are recorded at fair value with any unrealized holding
gains or losses, net of tax, included as a component of earnings and other
comprehensive income employed in the business. Investments in debt securities
are classified as held-to-maturity, as management has both the intent and
ability to hold these securities to maturity, and are reported at cost, net of
any unamortized premium or discount. Income relating to these securities is
reported as interest income.
INVENTORIES - Inventories are stated at the lower of cost (first-in, first-out
basis) or market. Cost includes material and conversion costs.
PROPERTY AND EQUIPMENT - Depreciation and amortization are provided on a
straight-line basis over the estimated useful lives of the assets. In 1998, the
Company elected early adoption of the provisions of the American Institute of
Certified Public Accountants' Statement of Position 98-1, "Accounting for the
Costs of Computer Software Developed or Obtained for Internal Use." This
statement requires capitalization of certain costs incurred in the development
of internal-use software. Adoption of the provisions of this statement did not
have a material effect on the financial statements of the Company. The
following table shows estimated useful lives of property and equipment:
Classification Expected Useful Lives
-------------- ---------------------------------
Buildings 10 to 50 years (average 29 years)
Equipment 3 to 20 years (average 11 years)
Long-lived assets are reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount may not be recoverable. If the
fair value is less than the carrying amount of the asset, a loss is recognized
for the difference.
INTANGIBLE ASSETS - Intangible assets, primarily purchased intangible assets and
goodwill resulting from business acquisitions, are amortized on a straight-line
basis over up to 40 years. Accumulated amortization as of December 31, 1998,
1997, and 1996, was $163 million, $98 million, and $55 million, respectively.
Abbott Laboratories and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
PRODUCT LIABILITY - Provisions are made for the portions of probable losses that
are not covered by product liability insurance.
TRANSLATION ADJUSTMENTS - For foreign operations in highly inflationary
economies, translation gains and losses are included in net foreign exchange
(gain) loss. For remaining foreign operations, translation adjustments are
included as a component of earnings and other comprehensive income employed in
the business.
REVENUE RECOGNITION - Revenue from product sales is recognized upon shipment to
customers. Provisions for discounts and rebates to customers, and returns and
other adjustments are provided for in the same period the related sales are
recorded.
RESEARCH AND DEVELOPMENT - Internal research and development costs are expensed
as incurred. Third-party research and development costs are expensed when the
contracted work has been performed or as milestone results have been achieved.
COMPREHENSIVE INCOME - In 1998, the Company adopted the provisions of Statement
of Financial Accounting Standards No. 130, "Reporting Comprehensive Income." As
a result, certain balance sheet reclassifications were made to previously
reported amounts to achieve the required presentation of comprehensive income.
Abbott Laboratories and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Note 2 - Supplemental Financial Information
(dollars in thousands)
1998 1997 1996
---------- -------- --------
Other prepaid expenses and receivables
Receivables purchased from TAP Holdings Inc.
under a factoring agreement. . . . . . . . . . . . . $ 310,993 $344,979 $255,455
All other. . . . . . . . . . . . . . . . . . . . . . . 651,005 571,402 446,949
---------- -------- --------
Total. . . . . . . . . . . . . . . . . . . . . . . . . $ 961,998 $916,381 $702,404
---------- -------- --------
---------- -------- --------
Other liabilities and deferrals
Accrued post-employment costs. . . . . . . . . . . . . $ 477,417 $409,169 $342,582
All other. . . . . . . . . . . . . . . . . . . . . . . 614,351 544,257 532,942
---------- -------- --------
Total. . . . . . . . . . . . . . . . . . . . . . . . . $1,091,768 $953,426 $875,524
---------- -------- --------
---------- -------- --------
Net interest expense
Interest expense . . . . . . . . . . . . . . . . . . . $ 159,839 $134,550 $ 95,445
Interest income. . . . . . . . . . . . . . . . . . . . (55,721) (47,748) (44,521)
---------- -------- --------
Total. . . . . . . . . . . . . . . . . . . . . . . . . $ 104,118 $ 86,802 $ 50,924
---------- -------- --------
---------- -------- --------
Abbott Laboratories and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Note 3 - Taxes on Earnings
(dollars in thousands)
Deferred income taxes reflect the tax consequences on future years of temporary
differences between the tax bases of assets and liabilities and their financial
reporting amounts. U.S. income taxes are provided on those earnings of foreign
subsidiaries and subsidiaries operating in Puerto Rico under tax incentive
grants, which are intended to be remitted to the parent company. Undistributed
earnings reinvested indefinitely in foreign subsidiaries as working capital and
plant and equipment aggregated $1,818,000 at December 31, 1998. Deferred income
taxes not provided on these earnings would be approximately $356,000.
Earnings before taxes, and the related provisions for taxes on earnings,
were as follows:
Earnings Before Taxes 1998 1997 1996
---------- ---------- ----------
Domestic . . . . . . . . . . . . . . . . . . . . . . . . . . . . $2,519,719 $2,236,393 $1,934,872
Foreign. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 720,880 713,553 734,678
---------- ---------- ----------
Total. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $3,240,599 $2,949,946 $2,669,550
---------- ---------- ----------
---------- ---------- ----------
Taxes on Earnings 1998 1997 1996
---------- ---------- ----------
Current:
U.S. Federal and Possessions . . . . . . . . . . . . . . . . . $743,980 $717,156 $573,208
State. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 49,869 71,447 62,835
Foreign. . . . . . . . . . . . . . . . . . . . . . . . . . . . 184,100 171,259 207,512
---------- ---------- ----------
Total current. . . . . . . . . . . . . . . . . . . . . . . . . . 977,949 959,862 843,555
---------- ---------- ----------
Deferred:
Domestic . . . . . . . . . . . . . . . . . . . . . . . . . . . (92,681) (130,634) (68,762)
Foreign. . . . . . . . . . . . . . . . . . . . . . . . . . . . 25,219 26,836 13,338
Enacted tax rate changes . . . . . . . . . . . . . . . . . . . (3,119) (580) (614)
---------- ---------- ----------
Total deferred . . . . . . . . . . . . . . . . . . . . . . . . . (70,581) (104,378) (56,038)
---------- ---------- ----------
Total. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $907,368 $855,484 $787,517
---------- ---------- ----------
---------- ---------- ----------
Differences between the effective income tax rate and the U.S. statutory tax
rate were as follows:
1998 1997 1996
---- ---- ----
Statutory tax rate . . . . . . . . . . . . . . . . . . . . . . . . 35.0% 35.0% 35.0%
Benefit of tax exemptions in Puerto Rico, the Dominican Republic,
Ireland, the Netherlands, and Italy. . . . . . . . . . . . . . . (4.9) (6.1) (6.5)
State taxes, net of federal benefit. . . . . . . . . . . . . . . . 1.0 1.6 1.5
Domestic dividend exclusion. . . . . . . . . . . . . . . . . . . . (2.3) (1.8) (1.4)
All other, net . . . . . . . . . . . . . . . . . . . . . . . . . . (0.8) 0.3 0.9
---- ---- ----
Effective tax rate . . . . . . . . . . . . . . . . . . . . . . . . 28.0% 29.0% 29.5%
---- ---- ----
---- ---- ----
Abbott Laboratories and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
As of December 31, 1998, 1997, and 1996, total deferred tax assets were
$1,269,441, $1,144,915, and $997,036, respectively, and total deferred tax
liabilities were $487,207, $461,943, and $427,412, respectively. Valuation
allowances for deferred tax assets were not significant. The temporary
differences that give rise to deferred tax assets and liabilities were as
follows:
Investment Securities Maturing after One Year 1998 1997 1996
--------- --------- ---------
Compensation and employee benefits . . . . . . . . . . . . . . . $ 254,026 $ 205,423 $ 185,537
Trade receivable reserves. . . . . . . . . . . . . . . . . . . . 173,525 176,070 130,692
Inventory reserves . . . . . . . . . . . . . . . . . . . . . . . 115,693 119,398 122,522
Deferred intercompany profit . . . . . . . . . . . . . . . . . . 177,515 135,211 112,467
State income taxes . . . . . . . . . . . . . . . . . . . . . . . 26,585 32,442 30,343
Depreciation . . . . . . . . . . . . . . . . . . . . . . . . . . (197,832) (196,233) (184,270)
Other, primarily other accruals and reserves not currently
deductible, and the excess of book basis over tax basis
of intangible assets . . . . . . . . . . . . . . . . . . . . . 188,678 191,766 157,832
--------- --------- ---------
Total. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 738,190 $ 664,077 $ 555,123
--------- --------- ---------
--------- --------- ---------
Abbott Laboratories and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Note 4 - Investment Securities
(dollars in thousands)
The following is a summary of investment securities at December 31:
Current Investment Securities 1998 1997 1996
-------- -------- --------
Time deposits and certificates of deposit . . . . . . . . . $ 50,000 $ 25,700 $ 800
Other, primarily debt obligations issued or guaranteed
by various governments or government agencies. . . . . . 25,087 3,286 12,075
-------- -------- --------
Total. . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 75,087 $ 28,986 $ 12,875
-------- -------- --------
-------- -------- --------
Investment Securities Maturing after One Year 1998 1997 1996
-------- -------- --------
Time deposits and certificates of deposit,
maturing through 2001. . . . . . . . . . . . . . . . . . $486,500 $406,500 $432,200
Corporate debt obligations, maturing through 2008 . . . . . 112,320 82,143 84,310
Debt obligations issued or guaranteed
by various governments or government agencies,
maturing through 2023. . . . . . . . . . . . . . . . . . 185,022 142,324 149,043
-------- -------- --------
Total. . . . . . . . . . . . . . . . . . . . . . . . . . . . $783,842 $630,967 $665,553
-------- -------- --------
-------- -------- --------
The Company has both the intent and ability to hold the above investment
securities until maturity, and therefore they are classified as held-to-maturity
securities. All investment securities classified as current as of December 31,
1998, mature in 1999.
Of the investment securities listed above, $858,809, $656,634, and
$676,251, were held at December 31, 1998, 1997, and 1996, respectively, by
subsidiaries operating in Puerto Rico under tax incentive grants expiring from
2002 through 2007. In addition, these subsidiaries held cash equivalents of
$74,900 and $81,100 at December 31, 1998, and 1997, respectively.
The Company maintains a portfolio of available-for-sale equity securities
from strategic technology acquisitions which are included in deferred charges
and other assets. The fair value of marketable equity securities is $98,075,
$83,083, and $58,691, and the cost basis of nonmarketable equity securities is
$75,901, $50,202 and $28,457 as of December 31, 1998, 1997 and 1996,
respectively.
Abbott Laboratories and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Note 5 - Post-Employment Benefits
(dollars in thousands)
Retirement plans consist of defined benefit, defined contribution, and medical
and dental plans.
Information for the Company's major defined benefit plans and
post-employment medical and dental benefit plans is as follows:
Defined Benefit Plans Medical and Dental Plans
----------------------------------- ----------------------------------
1998 1997 1996 1998 1997 1996
---------- ---------- ---------- --------- --------- ---------
Projected benefit obligations, January 1 . . . . . . . $2,000,329 $1,771,191 $1,494,348 $ 646,448 $ 599,631 $ 556,969
Service cost - benefits earned during the year . . . . 108,754 97,272 81,243 30,664 28,274 28,302
Interest cost on projected benefit obligations . . . . 140,287 128,404 111,449 43,770 42,167 40,822
Actuarial loss (gain), primarily changes in discount
rate and lower than estimated health care costs. . . 182,829 95,495 154,993 18,057 (5,389) (9,149)
Benefits paid. . . . . . . . . . . . . . . . . . . . . (85,722) (77,722) (66,776) (23,993) (18,235) (17,313)
Other, primarily translation . . . . . . . . . . . . . 2,143 (14,311) (4,066) ... ... ...
---------- ---------- ---------- --------- --------- ---------
Projected benefit obligations, December 31 . . . . . . $2,348,620 $2,000,329 $1,771,191 $ 714,946 $ 646,448 $ 599,631
---------- ---------- ---------- --------- --------- ---------
---------- ---------- ---------- --------- --------- ---------
Plans' assets at fair value, January 1,
principally listed securities. . . . . . . . . . . . $2,192,486 $1,828,989 $1,600,368 $86,600 $87,719 $95,530
Actual return on plans' assets . . . . . . . . . . . . 426,023 373,405 224,624 18,656 17,009 9,372
Company contributions. . . . . . . . . . . . . . . . . 18,945 76,083 69,674 1,265 107 130
Benefits paid. . . . . . . . . . . . . . . . . . . . . (85,722) (77,722) (66,776) (23,993) (18,235) (17,313)
Other, primarily translation . . . . . . . . . . . . . (761) (8,269) 1,099 ... ... ...
---------- ---------- ---------- --------- --------- ---------
Plans' assets at fair value, December 31,
principally listed securities. . . . . . . . . . . . $2,550,971 $2,192,486 $1,828,989 $82,528 $86,600 $87,719
---------- ---------- ---------- --------- -------- --------
---------- ---------- ---------- --------- --------- ---------
Projected benefit obligations less than (greater than)
plans' assets, December 31 . . . . . . . . . . . . . $ 202,351 $ 192,157 $ 57,798 $(632,418) $(559,848) $(511,912)
Unrecognized actuarial (gains) losses, net . . . . . . (143,876) (78,522) 51,531 137,701 133,379 152,030
Unrecognized prior service cost. . . . . . . . . . . . 6,134 9,053 11,968 ... ... ...
Unrecognized transition obligation . . . . . . . . . . (21,015) (32,085) (42,728) ... ... ...
---------- ---------- ---------- --------- --------- ---------
Prepaid (accrued) benefit cost . . . . . . . . . . . . $ 43,594 $ 90,603 $ 78,569 $(494,717) $(426,469) $(359,882)
---------- ---------- ---------- --------- --------- ---------
---------- ---------- ---------- --------- --------- ---------
Service cost - benefits earned during the year . . . . $ 108,754 $ 97,272 $81,243 $30,664 $28,274 $28,302
Interest cost on projected benefit obligations . . . . 140,287 128,404 111,449 43,770 42,167 40,822
Expected return on plans' assets . . . . . . . . . . . (179,194) (148,250) (136,062) (7,211) (7,035) (7,793)
Net amortization . . . . . . . . . . . . . . . . . . . (7,728) (7,154) (7,464) 2,290 3,288 5,549
---------- ---------- ---------- --------- --------- ---------
Net cost . . . . . . . . . . . . . . . . . . . . . . . $ 62,119 $ 70,272 $ 49,166 $ 69,513 $ 66,694 $ 66,880
---------- ---------- ---------- --------- --------- ---------
---------- ---------- ---------- --------- --------- ---------
Abbott Laboratories and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The projected benefit obligations for certain foreign defined benefit plans that
do not have plan assets were $62,719, $52,841, and $69,337 at December 31, 1998,
1997, and 1996, respectively.
Assumptions used for major benefit plans as of December 31 include:
1998 1997 1996
----- ----- -----
Discount rate for determining obligations and interest cost. . . . . . 6 3/4% 7 1/4% 7 1/2%
Expected aggregate average long-term change in compensation. . . . . . 5% 5% 5%
Expected long-term rate of return on assets. . . . . . . . . . . . . . 9 1/2% 9 1/2% 9%
A five percent annual rate of increase in the per capita cost of covered health
care benefits is assumed.
A one-percentage point increase/(decrease) in the assumed health care
cost trend rate would increase/(decrease) the accumulated post-employment
benefit obligations as of December 31, 1998, by approximately
$139,214/($114,623), and the total of the service and interest cost
components of net post-employment health care cost for the year then ended by
approximately $17,612/($14,289).
The Stock Retirement Plan is the principal defined contribution plan.
Company contributions to this plan were $66,911 in 1998, $60,838 in 1997, and
$54,883 in 1996, equal to 7.33 percent of dividends declared, as provided under
the plan.
The Company provides certain other post-employment benefits, primarily
salary continuation plans, to qualifying domestic employees, and accrues for the
related cost over the service lives of the employees.
Abbott Laboratories and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Note 6 - Financial Instruments and Derivatives
The Company enters into foreign currency forward exchange contracts to hedge
intercompany loans and trade accounts payable where the receivable or payable
is denominated in a currency other than the functional currency of the
entity. Such contracts are also used to hedge foreign currency denominated
third-party trade payables and receivables. For intercompany loans, the
contracts require the Company to sell foreign currencies, primarily European
currencies and Japanese yen, in exchange for primarily U.S. dollars and other
European currencies. For intercompany and trade payables and receivables,
the currencies hedged are primarily the U.S. dollar, European currencies and
Japanese yen. At December 31, 1998, 1997, and 1996, the Company held $1.6
billion, $1.3 billion, and $1.0 billion, respectively, of foreign currency
forward exchange contracts. The contracts outstanding at December 31, 1998,
mature in 1999. These contracts are marked to market each month. The
resulting gains or losses are reflected in income and are generally offset by
losses or gains on the exposures being hedged.
The Company's foreign subsidiaries purchase U.S. dollar call options as a
hedge of anticipated intercompany purchases by these subsidiaries whose
functional currency is not the U.S. dollar. These contracts give the Company
the right, but not the requirement, to purchase U.S. dollars in exchange for
foreign currencies, primarily European currencies and Japanese yen, at
predetermined exchange rates. At December 31, 1998, 1997, and 1996, the Company
held $406 million, $461 million, and $431 million, respectively, of U.S. dollar
call option contracts. The contracts outstanding at December 31, 1998, mature
in 1999. Realized and unrealized gains and losses on contracts that qualify as
hedges of anticipated purchases by foreign subsidiaries are recognized in the
same period that the foreign currency exposure is recognized. Contracts that do
not qualify for hedge accounting are marked to market each month, and the
resulting gains or losses are reflected in income.
The Company purchases foreign currency put options as a hedge against the
effect of exchange rate fluctuations on income. These contracts give the
Company the right, but not the requirement, to sell foreign currencies,
primarily European currencies and Japanese yen, in exchange for U.S. dollars at
predetermined exchange rates. These contracts are marked to market each month.
The resulting gains or losses are reflected in income and are generally offset
by losses or gains on the exposures being hedged. There were no such contracts
outstanding at December 31, 1998, 1997, and 1996.
Net unrealized losses on foreign currency forward exchange contracts are
included in other prepaid expenses and receivables, and net unrealized gains are
included in other accrued liabilities. Gains and losses are classified as net
foreign exchange (gain) loss. For U.S. dollar call options, net unrealized
gains and losses and unamortized premiums are included in other prepaid expenses
and receivables, and for foreign currency put options and U.S. dollar call
options that do not qualify for hedge accounting, gains and losses are included
as net foreign exchange (gain) loss. For U.S. dollar call options that qualify
for hedge accounting treatment, gains and losses are included in cost of
products sold at the time the products are sold.
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative Instruments
and Hedging Activities." This statement requires the recognition of the fair
value of derivatives as either assets or liabilities. The statement is
effective for fiscal years beginning after June 15, 1999. Adoption of the
provisions of this statement will not have a material effect on the financial
statements of the Company.
Abbott Laboratories and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The gross unrealized holding gains (losses) on current held-to-maturity
investment securities and those maturing after one year totaled $3.7 million and
$(9.6) million, respectively, at December 31, 1998; $4.1 million and $(10.2)
million, respectively, at December 31, 1997; and $4.2 million and $(11.0)
million, respectively, at December 31, 1996. The gross unrealized holding gains
(losses) on available-for-sale marketable equity securities, classified as
deferred charges and other assets, totaled $61.7 million and $(6.7) million,
respectively, at December 31, 1998. The gross unrealized holding gains on
available-for-sale marketable equity securities were $54.0 million and $51.0
million, respectively, at December 31, 1997 and 1996.
The carrying values and fair values of certain of the Company's financial
instruments as of December 31 are shown in the table below. The carrying values
of all other financial instruments approximate their estimated fair values.
Fair value is the quoted market price of the instrument held or the quoted
market price of a similar instrument. The counterparties to financial
instruments consist of select major international financial institutions. The
Company does not expect any losses from nonperformance by these counterparties.
(millions of dollars)
1998 1997 1996
-----------------------------------------------------------------------
Carrying Fair Carrying Fair Carrying Fair
Value Value Value Value Value Value
--------------------- --------------------- ---------------------
Investment Securities:
Current. . . . . . . . . . . . . . . . . $ 75.1 $ 75.7 $ 29.0 $ 29.1 $ 12.9 $ 12.7
Maturing after One Year. . . . . . . . . 783.8 777.3 631.0 624.8 665.6 659.0
Total Long-Term Debt . . . . . . . . . . . . (1,340.8) (1,400.9) (940.6) (946.0) (935.2) (917.0)
Foreign Currency Forward
Exchange Contracts:
(Payable) position . . . . . . . . . . . (14.2) (14.2) (6.2) (6.2) (10.9) (10.9)
Receivable position. . . . . . . . . . . 21.7 21.7 24.1 24.1 18.6 18.6
Foreign Currency Option Contracts. . . . . . 14.4 3.6 14.8 15.3 2.8 1.6
Abbott Laboratories and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Note 7 - Common Stock Split
On February 13, 1998, the Board of Directors approved a two-for-one stock
split. Shareholders of record on May 1, 1998, were issued an additional
share of the Company's common stock on May 29, 1998, for each share owned on
the record date. All common shares and per share data in the consolidated
financial statements and notes have been adjusted to reflect the stock split.
Abbott Laboratories and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Note 8 - Incentive Stock Program
The 1996 Incentive Stock Program authorizes the granting of stock options,
replacement stock options, stock appreciation rights, limited stock
appreciation rights, restricted stock awards, performance units, and foreign
qualified benefits. Stock options, replacement stock options, limited stock
appreciation rights, restricted stock awards, and foreign qualified benefits
have been granted and are currently outstanding under this program and prior
programs. The purchase price of shares under option must be at least equal to
the fair market value of the common stock on the date of grant and the
maximum term of an option is ten years. Options granted in 1998, 1997, and
1996 vest equally over three years except for replacement options which
generally vest in six months.
Limited stock appreciation rights have been granted to certain holders of
stock options and can be exercised, by surrendering the related stock options,
only upon a change in control of the Company. At December 31, 1998, 7,319,089
options, with a weighted average exercise price of $25.10 per share, were
subject to limited stock appreciation rights. Upon a change in control of the
Company, all outstanding stock options become fully exercisable, and all terms
and conditions of all restricted stock awards are deemed satisfied.
At January 1, 1999, 23,244,070 shares were reserved for future grants under
the 1996 Program. Subsequent to year end, the Board of Directors granted
approximately 13.3 million stock options from this reserve. Data with respect
to stock options under the 1996 Program and prior programs are as follows:
OPTIONS OUTSTANDING EXERCISABLE OPTIONS
------------------- -------------------
Weighted Weighted
Average Average
Exercise Exercise
Shares Price Shares Price
----------- -------- ----------- --------
January 1, 1996 59,001,574 $13.91
Granted 12,243,128 21.98
Exercised (10,207,402) 10.19
Lapsed (563,110) 20.20
----------- ------
December 31, 1996 60,474,190 16.11 39,914,828 $13.75
----------- ------
----------- ------
Granted 14,203,498 29.72
Exercised (15,268,426) 11.37
Lapsed (753,016) 24.18
----------- ------
December 31, 1997 58,656,246 20.54 33,544,332 16.56
----------- ------
----------- ------
Granted 17,894,254 37.92
Exercised (13,641,871) 18.30
Lapsed (949,032) 31.21
----------- ------
December 31, 1998 61,959,597 $25.89 35,018,732 $20.23
----------- ------ ----------- ------
----------- ------ ----------- ------
Abbott Laboratories and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Options Outstanding Exercisable Options
at December 31, 1998 at December 31, 1998
------------------------ --------------------
Weighted Weighted Weighted
Average Average Average
Range of Remaining Exercise Exercise
Exercise Prices Shares Life (Years) Price Shares Price
- ----------------- ---------- ------------ -------- ---------- --------
$ 6 to $21 23,408,676 4.2 $16.47 23,376,410 $16.47
22 to 36 22,423,247 7.8 26.88 10,647,080 26.82
37 to 50 16,127,674 9.2 38.17 995,242 38.04
---------- --- ------ ---------- ------
$ 6 to $50 61,959,597 6.8 $25.89 35,018,732 $20.23
---------- --- ------ ---------- ------
---------- --- ------ ---------- ------
The Company measures compensation cost using the intrinsic value-based method
of accounting. Had compensation cost been determined using the fair market
value-based accounting method for options granted since 1995, pro forma net
income for 1998, 1997, and 1996 would have been $2.243 billion, $2.030
billion and $1.845 billion, respectively, and pro forma basic earnings per
common share for 1998, 1997 and 1996 would have been $1.47, $1.32 and $1.18,
respectively. The weighted average fair value of an option granted in 1998,
1997 and 1996, was $10.31, $8.21 and $5.82, respectively. For purposes of
fair market value disclosures, the fair market value of an option grant was
estimated using the Black-Scholes option pricing model with the following
assumptions:
1998 1997 1996
---- ---- ----
Risk-Free Interest Rate. . . . . . . . . 5.50% 6.00% 5.25%
Average Life of Options (years). . . . . 5.6 5.2 5.2
Volatility . . . . . . . . . . . . . . . 23.0% 25.0% 25.0%
Dividend Yield . . . . . . . . . . . . . 1.6% 1.9% 1.9%
Abbott Laboratories and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Note 9 - Debt and Lines of Credit
(dollars in thousands)
The following is a summary of long-term debt at December 31:
1998 1997 1996
---------- -------- --------
6.5% debentures, due 2001. . . . . . . . $ 250,000 $250,000 $250,000
5.6% debentures, due 2003. . . . . . . . 200,000 200,000 200,000
6.8% debentures, due 2005. . . . . . . . 150,000 150,000 150,000
6.4% debentures, due 2006. . . . . . . . 250,000 250,000 250,000
6.0% debentures, due 2008. . . . . . . . 200,000 - -
5.4% debentures, due 2008. . . . . . . . 200,000 - -
Other. . . . . . . . . . . . . . . . . . 89,694 87,983 82,898
---------- -------- --------
Total, net of current maturities . . . . $1,339,694 $937,983 $932,898
---------- -------- --------
---------- -------- --------
Payments required on long-term debt outstanding at December 31, 1998 are $1,125
in 1999, $9,926 in 2000, $250,926 in 2001, $1,351 in 2002, and $201,280 in 2003.
At December 31, 1998, the Company had $2,505,000 of unused domestic lines
of credit which support domestic commercial paper borrowing arrangements.
Related compensating balances, which are subject to withdrawal by the Company at
its option, and commitment fees are not material. The Company's weighted
average interest rate on short-term borrowings was 5.5%, 6.0%, and 5.8% at
December 31, 1998, 1997, and 1996, respectively.
The Company may issue up to $750,000 of senior debt securities in the
future under a registration statement filed with the Securities and Exchange
Commission in 1998.
Abbott Laboratories and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Note 10 - Investment in Equity Method Investments
(dollars in millions)
The Company's 50 percent owned joint venture, TAP Holdings Inc. (TAP), is
accounted for under the equity method of accounting. The Company's share of
TAP's income was $266, $189, and $130 in 1998, 1997, and 1996, respectively.
The investment in TAP is included in deferred charges and other assets and was
$368, $311, and $185 at December 31, 1998, 1997, and 1996, respectively.
Dividends received from TAP were $209, $63, and $20 in 1998, 1997, and 1996,
respectively. Summarized financial information for TAP is as follows:
Year Ended December 31
---------------------------------
1998 1997 1996
-------- -------- --------
Net Sales. . . . . . . . . . . . . . . . $2,062.7 $1,565.8 $1,128.6
Cost of products sold. . . . . . . . . . 426.5 321.1 270.6
Income before income taxes . . . . . . . 836.3 612.4 426.7
Net income . . . . . . . . . . . . . . . 532.7 379.0 259.4
December 31
---------------------------------
1998 1997 1996
-------- -------- --------
Current assets . . . . . . . . . . . . . $1,088.8 $ 727.5 $ 439.0
Total assets . . . . . . . . . . . . . . 1,251.1 847.9 577.1
Current liabilities. . . . . . . . . . . 514.2 223.2 198.5
Undistributed earnings of investments accounted for under the equity method
amounted to $345 as of December 31, 1998.
Abbott Laboratories and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Note 11 - Quarterly Results (Unaudited)
(dollars in millions except per share data)
1998 1997 1996
-------- -------- --------
FIRST QUARTER
Net Sales. . . . . . . . . . . . . . . . $3,044.9 $2,999.8 $2,672.2
Gross Profit . . . . . . . . . . . . . . 1,764.9 1,672.5 1,516.0
Net Earnings . . . . . . . . . . . . . . 589.6 534.8 480.1
Basic Earnings Per Common Share. . . . . .39 .34 .30
Diluted Earnings Per Common Share. . . . .38 .34 .30
SECOND QUARTER
Net Sales. . . . . . . . . . . . . . . . $3,066.8 $2,900.4 $2,699.2
Gross Profit . . . . . . . . . . . . . . 1,769.0 1,683.4 1,555.3
Net Earnings . . . . . . . . . . . . . . 585.6 521.5 470.4
Basic Earnings Per Common Share. . . . . .38 .34 .30
Diluted Earnings Per Common Share. . . . .38 .33 .30
THIRD QUARTER
Net Sales. . . . . . . . . . . . . . . . $3,035.8 $2,865.2 $2,646.2
Gross Profit . . . . . . . . . . . . . . 1,660.8 1,623.3 1,468.9
Net Earnings . . . . . . . . . . . . . . 531.7 471.5 420.9
Basic Earnings Per Common Share. . . . . .35 .31 .27
Diluted Earnings Per Common Share. . . . .34 .30 .26
FOURTH QUARTER
Net Sales. . . . . . . . . . . . . . . . $3,330.3 $3,118.1 $2,995.9
Gross Profit . . . . . . . . . . . . . . 1,888.7 1,858.6 1,741.3
Net Earnings . . . . . . . . . . . . . . 626.3 566.7 510.6
Basic Earnings Per Common Share. . . . . .41 .37 .33
Diluted Earnings Per Common Share. . . . .41 .37 .33
Abbott Laboratories and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Note 12 - Business Acquisitions
In 1998, the Company acquired the common stock of International Murex
Technologies Corporation, a manufacturer of medical diagnostic products, for
approximately $234 million in cash. A substantial portion of the purchase
price was allocated to goodwill, which will be amortized on a straight-line
basis over 20 years. In 1997, the Company acquired certain parenteral
products businesses of Sanofi Pharmaceuticals, Inc., for approximately $200
million in cash. A substantial portion of the purchase price was allocated
to goodwill, which will be amortized on a straight-line basis over 15 years.
In 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. Goodwill of approximately $219 million
will be amortized on a straight-line basis over 32 years and other intangible
assets of $635 million, including trade names, patient base and acquired
technology, will be amortized on a straight-line basis over approximately 30
years. Purchased in-process research and development of $37 million was
charged against earnings. Had these acquisitions taken place on January 1 of
the previous years, consolidated sales and income would not have been
significantly different from reported amounts.
The Company currently owns 76 percent of the capital stock of a Japanese
subsidiary. In 1998, the Japanese subsidiary converted the common stock of
the minority interest shareholder into non-voting, non-participating
cumulative preferred stock. Pursuant to an agreement with the minority
interest shareholder, the Company will purchase this preferred stock over an
eight-year period beginning in 1999 for approximately $115 million. In 1998
and 1997, the Company purchased six percent of the subsidiary's common stock
for approximately $30 million. Goodwill of $110 million resulting from these
transactions will be amortized on a straight-line basis over 40 years.
Abbott Laboratories and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Note 13 - Segment and Geographic Area Information
(dollars in millions)
REVENUE SEGMENTS - The Company's principal business is the discovery,
development, manufacture and sale of a broad line of health care products and
services. The Company's products are generally sold directly to retailers,
wholesalers, hospitals, health care facilities, laboratories, physicians'
offices and government agencies throughout the world. The Company's products
are sold through six revenue segments as follows:
PHARMACEUTICAL PRODUCTS - U.S. sales of a broad line of pharmaceuticals.
DIAGNOSTIC PRODUCTS - Worldwide sales of diagnostic systems for blood
banks, hospitals, consumers, commercial laboratories and alternate-care testing
sites.
HOSPITAL PRODUCTS - U.S. sales of 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.
ROSS PRODUCTS - U.S. sales of a broad line of adult and pediatric
nutritional products, pediatric pharmaceuticals and consumer products.
INTERNATIONAL - Non-U.S. sales of all the Company's pharmaceutical,
hospital and nutritional products. Products sold by International are
manufactured by domestic segments and by international manufacturing locations.
CHEMICAL & AGRICULTURAL PRODUCTS - Worldwide sales of chemicals and
agricultural products for crop protection, forestry and animal health and a
supplier of bulk drugs for the Pharmaceutical Products, Hospital Products, and
International segments.
The Company's underlying accounting records are maintained on a legal
entity basis for government and public reporting requirements. Segment
disclosures are on a performance basis consistent with internal management
reporting. Intersegment transfers of inventory are recorded at standard cost
and are not a measure of segment operating earnings. The cost of some
corporate functions and the cost of certain employee benefits are sold to
segments at predetermined rates which approximate cost. Remaining costs, if
any, are not allocated to revenue segments. The following segment
information has been prepared in accordance with the internal accounting
policies of the Company, as described above, and may not be presented in
accordance with generally accepted accounting principles.
Abbott Laboratories and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Note 13 - Segment and Geographic Area Information
(dollars in millions)
(continued)
Net Sales to Operating Depreciation
External Customers Earnings and Amortization
--------------------------- -------------------------- --------------------------
1998 1997 1996 1998 1997 1996 1998 1997 1996
------ ------ ------ ------ ------ ------ ------ ------ ------
Pharmaceutical . . . . . $ 2,601 $ 2,475 $ 2,058 $1,402 $1,242 $ 970 $ 40 $ 37 $ 31
Diagnostics (a)(b) . . . 2,790 2,613 2,571 448 433 493 245 234 203
Hospital (c) . . . . . . 1,890 1,689 1,476 369 277 230 119 109 101
Ross . . . . . . . . . . 1,820 1,850 1,898 540 528 597 72 68 64
International (a). . . . 3,001 2,912 2,736 605 637 596 98 97 91
Chemical & Agricultural. 352 332 278 117 111 72 66 63 57
------- ------- ------- ------ ------ ------ ---- ---- ----
Total Segments . . . . . 12,454 11,871 11,017 $3,481 $3,228 $2,958 $640 $608 $547
------ ------ ------ ---- ---- ----
------ ------ ------ ---- ---- ----
Other. . . . . . . . . . 24 12 (4)
Net Sales. . . . . . . . $12,478 $11,883 $11,013
------- ------- -------
------- ------- -------
Additions to
Long-Term Assets Total Assets
-------------------------- ---------------------------
1998 1997 1996 1998 1997 1996
------ ------ ------ ------ ------ ------
Pharmaceutical . . . . . $ 54 $ 53 $ 49 $ 1,315 $1,362 $1,237
Diagnostics (a)(b) . . . 541 391 1,049 3,480 3,006 3,040
Hospital (c) . . . . . . 157 295 172 1,563 1,522 1,262
Ross . . . . . . . . . . 65 85 102 919 935 954
International (a). . . . 309 150 147 2,504 2,140 2,093
Chemical & Agricultural. 60 83 94 368 379 343
------ ------ ------ ------- ------ ------
Total Segments . . . . . $1,186 $1,057 $1,613 $10,149 $9,344 $8,929
------ ------ ------ ------- ------ ------
------ ------ ------ ------- ------ ------
Other. . . . . . . . . .
Net Sales. . . . . . . .
(a) Net sales and operating earnings were unfavorably affected by the
relatively stronger U.S. dollar in 1998, 1997 and 1996.
(b) In 1998 and 1996 the Company acquired the common stock of International
Murex Technologies Corporation and MediSense, Inc., respectively.
(c) In 1997, the Company acquired certain parenteral products businesses of
Sanofi Pharmaceuticals, Inc.
1998 1997 1996
----- ----- -----
Total Segment Operating Earnings . . . . $3,481 $3,228 $2,958
Corporate and service functions. . . . . 145 153 118
Benefit plans costs. . . . . . . . . . . 94 113 92
Net interest expense . . . . . . . . . . 104 87 51
Income from TAP Holdings Inc . . . . . . (266) (189) (130)
Net foreign exchange (gain) loss . . . . 31 (9) 22
Other expenses, net. . . . . . . . . . . 132 123 135
------- ------- -------
Consolidated Earnings Before Taxes . . . $3,241 $2,950 $2,670
------- ------- -------
------- ------- -------
Total Segment Assets . . . . . . . . . . $10,149 $9,344 $8,929
Cash and investments . . . . . . . . . . 1,167 890 789
Investment in TAP Holdings Inc.. . . . . 368 311 185
Prepaid income taxes . . . . . . . . . . 847 801 708
All other, net . . . . . . . . . . . . . 685 715 515
------- ------- -------
Total Assets . . . . . . . . . . . . . . $13,216 $12,061 $11,126
------- ------- -------
------- ------- -------
Abbott Laboratories and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Note 13 - Segment and Geographic Area Information
(dollars in millions)
(continued)
Net Sales to
External Customers Long-Term Assets
--------------------------- ---------------------------
1998 1997 1996 1998 1997 1996
---- ---- ---- ---- ---- ----
United States. . . . . . $ 7,919 $ 7,472 $ 6,786 $ 6,424 $ 5,946 $ 5,583
Japan. . . . . . . . . . 528 586 603 133 121 128
Germany. . . . . . . . . 446 438 428 186 167 171
Canada . . . . . . . . . 345 329 315 64 44 46
Italy. . . . . . . . . . 328 305 316 106 91 92
All Other Countries. . . 2,912 2,753 2,565 750 654 625
------- ------- ------- ------- ------- -------
Consolidated . . . . . . $12,478 $11,883 $11,013 $ 7,663 $ 7,023 $ 6,645
------- ------- ------- ------- ------- -------
------- ------- ------- ------- ------- -------
The classes of products which contributed at least 10 percent to consolidated
net sales in at least one of the last three years were:
1998 1997 1996
---- ---- ----
Anti-Infectives. . . . . $1,415 $1,510 $1,407
Adult Nutritionals . . . 1,257 1,240 1,226
Infant Formula . . . . . 1,132 1,166 1,153
Abbott Laboratories and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Note 14 - 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. These suits and investigations 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. During 1998, settlements were reached in the federal class
action lawsuit, whereby the Company paid $57 million, and thirteen other
separate actions. The Company has filed or intends to file a response to
each of the remaining complaints denying all substantive allegations.
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 Company expects that within the next year, legal proceedings will occur
which may result in 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.
Abbott Laboratories and Subsidiaries
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Shareholders of Abbott Laboratories:
We have audited the accompanying consolidated balance sheet of Abbott
Laboratories (an Illinois corporation) and Subsidiaries as of December 31, 1998,
1997, and 1996, and the related consolidated statements of earnings,
shareholders' investment, and cash flows for the years then ended. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Abbott Laboratories and
Subsidiaries as of December 31, 1998, 1997, and 1996, and the results of their
operations and their cash flows for the years then ended in conformity with
generally accepted accounting principles.
Chicago, Illinois Arthur Andersen LLP
January 14, 1999
AUDIT COMMITTEE CHAIRMAN'S REPORT
The Audit Committee of the Board of Directors is composed of six non-employee
directors. The Audit Committee oversees the Company's financial reporting
process on behalf of the Board of Directors. The Committee held two meetings
during 1998. In fulfilling its responsibility, the Committee recommended to the
Board of Directors, subject to shareholder approval, the selection of the
Company's independent public accountants. The Audit Committee discussed with
the internal auditors and the independent public accountants the overall scope
and specific plans for their respective audits. The Committee also discussed
the Company's consolidated financial statements and the adequacy of the
Company's internal controls. During the Audit Committee meetings, the Committee
met with the internal auditors and independent public accountants, without
management present, to discuss the results of their audits, their evaluations of
the Company's internal controls, and the overall quality of the Company's
financial reporting. The meetings also were designed to facilitate any private
communication with the Committee desired by the internal auditors or independent
public accountants.
W. Ann Reynolds, Ph.D.
Chairman, Audit Committee
Abbott Laboratories and Subsidiaries
MANAGEMENT REPORT ON FINANCIAL STATEMENTS
Management has prepared, and is responsible for, the Company's consolidated
financial statements and related notes. They have been prepared in
accordance with generally accepted accounting principles and necessarily
include amounts based on judgments and estimates by management. All
financial information in this annual report is consistent with the
consolidated financial statements.
The Company maintains internal accounting control systems and related
policies and procedures designed to provide reasonable assurance that assets are
safeguarded, that transactions are executed in accordance with management's
authorization and properly recorded, and that accounting records may be relied
upon for the preparation of consolidated financial statements and other
financial information. The design, monitoring, and revision of internal
accounting control systems involve, among other things, management's judgment
with respect to the relative cost and expected benefits of specific control
measures. The Company also maintains an internal auditing function which
evaluates and formally reports on the adequacy and effectiveness of internal
accounting controls, policies, and procedures.
The Company's consolidated financial statements have been audited by
independent public accountants who have expressed their opinion with respect to
the fairness of these statements.
Miles D. White
Chief Executive Officer
Gary P. Coughlan
Senior Vice President, Finance and Chief Financial Officer
Theodore A. Olson
Vice President and Controller
Abbott Laboratories and Subsidiaries
FINANCIAL INSTRUMENTS AND RISK MANAGEMENT
(Unaudited)
INTEREST RATE SENSITIVE FINANCIAL INSTRUMENTS
The Company does not currently use derivative financial instruments, such as
interest rate swaps, to manage its exposure to changes in interest rates for its
debt instruments and investment securities. As of December 31, 1998 and 1997,
the Company had $1.7 billion of domestic commercial paper outstanding with an
average interest rate of 5.4% and 6.0%, respectively, and with an average
remaining life of 9 days and 11 days, respectively. The fair market value of
long-term debt at December 31, 1998 and 1997 amounted to $1.4 billion and $946
million, respectively, and consisted primarily of fixed rate (average of 6.1%
and 6.3%, respectively) debt with maturities through 2023. As of December 31,
1998 and 1997, the fair market value of current and long-term investment
securities maturing through 2023 amounted to $853 million and $654 million,
respectively. Approximately 19 percent and 33 percent of these investments as
of December 31, 1998 and 1997, respectively, have fixed interest rates (average
of 7.1% and 7.5%, respectively), while the remaining investments have variable
rates. A hypothetical 100-basis point change in the interest rates would not
have a material effect on cash flows, income or market values.
MARKET PRICE SENSITIVE FINANCIAL INSTRUMENTS
The Company maintains a portfolio of available-for-sale marketable equity
securities from strategic technology acquisitions which are included in deferred
charges and other assets. The market value of these investments was
approximately $98 million and $83 million, respectively, as of December 31, 1998
and 1997. A hypothetical 20 percent decrease in the share prices of these
investments would decrease the fair value by approximately $20 million.
FOREIGN CURRENCY SENSITIVE FINANCIAL INSTRUMENTS --
PURCHASED U.S. DOLLAR CALL OPTIONS
The Company's foreign subsidiaries purchase U.S. dollar call options as a hedge
of anticipated intercompany purchases by these foreign subsidiaries whose
functional currency, primarily European currencies and Japanese yen, is not the
U.S. dollar. At December 31, 1998 and 1997, the Company held $406 million and
$461 million, respectively, of these contracts. Unamortized premiums for these
contracts amounted to $14 million as of December 31, 1998, which represents the
maximum potential loss exposure.
FOREIGN CURRENCY FORWARD EXCHANGE CONTRACTS
The Company enters into foreign currency forward exchange contracts to manage
its exposure to foreign currency denominated intercompany loans and trade
payables and third-party trade payables and receivables. The contracts are
marked to market and resulting gains or losses are reflected in income and are
generally offset by losses or gains on the foreign currency exposure being
hedged. At December 31, 1998 and 1997, the Company held $1.6 billion and $1.3
billion, respectively, of such contracts which all mature in the next calendar
year. The following table reflects the contracts outstanding at December 31,
1998 and 1997:
Abbott Laboratories and Subsidiaries
FINANCIAL INSTRUMENTS AND RISK MANAGEMENT (CONTINUED)
(Unaudited)
(dollars in millions)
1998 1997
---------------------------- ----------------------------
Average Fair and Average Fair and
Contract Exchange Carrying Contract Exchange Carrying
Amount Rate Value Amount Rate Value
------ ---- ----- ------ ---- -----
RECEIVE U.S. DOLLARS IN EXCHANGE FOR THE FOLLOWING CURRENCIES:
German Deutsche Mark . . . . . . . . . . . . . . . . . . . . . . $ 299 1.67 $ 1.9 $ 304 1.75 $ 1.9
Spanish Peseta . . . . . . . . . . . . . . . . . . . . . . . . . 172 140.6 4.3 151 146.3 3.0
Japanese Yen . . . . . . . . . . . . . . . . . . . . . . . . . . 137 120.0 3.2 122 122.8 3.7
Dutch Guilder. . . . . . . . . . . . . . . . . . . . . . . . . . 133 1.88 2.1 106 1.98 0.5
British Pound. . . . . . . . . . . . . . . . . . . . . . . . . . 160 0.6 0.3 70 0.6 2.1
Italian Lira . . . . . . . . . . . . . . . . . . . . . . . . . . 86 1,654 1.1 59 1,713 0.5
French Franc . . . . . . . . . . . . . . . . . . . . . . . . . . 39 5.6 0.6 33 5.8 0.5
Canadian Dollar. . . . . . . . . . . . . . . . . . . . . . . . . 38 1.54 (0.3) 30 1.41 0.1
Australian Dollar. . . . . . . . . . . . . . . . . . . . . . . . 36 1.60 0.0 24 1.44 0.4
Brazilian Real . . . . . . . . . . . . . . . . . . . . . . . . . 25 1.30 (0.5) 22 1.04 (0.2)
Taiwan Dollar. . . . . . . . . . . . . . . . . . . . . . . . . . 30 34.0 (0.6) 18 30.4 1.0
Hong Kong Dollar . . . . . . . . . . . . . . . . . . . . . . . . 3 7.88 0.0 13 7.73 (0.1)
Irish Punt . . . . . . . . . . . . . . . . . . . . . . . . . . . 33 0.67 (0.3) 12 0.67 (0.1)
All other currencies . . . . . . . . . . . . . . . . . . . . . . 148 N/A (1.8) 128 N/A 3.9
----- ----- ----- -----
1,339 10.0 1,092 17.2
RECEIVE DUTCH GUILDERS IN EXCHANGE FOR THE FOLLOWING CURRENCIES:
British Pound. . . . . . . . . . . . . . . . . . . . . . . . . . 92 0.32 (1.4) 74 0.31 (1.2)
French Franc . . . . . . . . . . . . . . . . . . . . . . . . . . 28 2.98 0.0 32 2.97 0.0
Swiss Franc. . . . . . . . . . . . . . . . . . . . . . . . . . . 15 0.72 (0.2) 24 0.72 0.0
Portuguese Escudo. . . . . . . . . . . . . . . . . . . . . . . . 32 90.9 0.0 17 91.2 0.0
Irish Punt . . . . . . . . . . . . . . . . . . . . . . . . . . . 19 0.36 0.0 17 0.34 0.0
Japanese Yen . . . . . . . . . . . . . . . . . . . . . . . . . . 15 62.5 0.3 14 62.1 0.4
Taiwan Dollar. . . . . . . . . . . . . . . . . . . . . . . . . . 8 17.6 (0.3) 8 15.3 0.5
All other currencies . . . . . . . . . . . . . . . . . . . . . . 15 N/A (0.3) 29 N/A 0.3
----- ----- ----- -----
224 (1.9) 215 0.0
All other. . . . . . . . . . . . . . . . . . . . . . . . . . . . 8 N/A (0.6) 5 N/A 0.7
----- ----- ----- -----
Total. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $1,571 $ 7.5 $1,312 $17.9
----- ----- ----- -----
----- ----- ----- -----
Abbott Laboratories and Subsidiaries
FINANCIAL REVIEW
RESULTS OF OPERATIONS
SALES
The following table details the components of sales growth by segment for the
last three years:
Components of Change %
Total % -----------------------------------
Total Net Sales Change Price Volume Exchange
------ ----- ------ --------
1998 vs. 1997 5.0 0.6 7.2 (2.8)
1997 vs. 1996 7.9 0.5 10.4 (3.0)
1996 vs. 1995 10.0 0.1 11.5 (1.6)
Total Domestic
1998 vs. 1997 6.0 1.0 5.0 -
1997 vs. 1996 10.0 0.8 9.2 -
1996 vs. 1995 10.8 0.1 10.7 -
Total International
1998 vs. 1997 3.4 (0.1) 10.7 (7.2)
1997 vs. 1996 4.8 - 12.2 (7.4)
1996 vs. 1995 8.8 0.2 12.4 (3.8)
Pharmaceutical Products Segment
1998 vs. 1997 5.1 3.8 1.3 -
1997 vs. 1996 20.3 3.4 16.9 -
1996 vs. 1995 27.3 4.9 22.4 -
Diagnostic Products Segment
1998 vs. 1997 6.8 (2.1) 12.9 (4.0)
1997 vs. 1996 1.6 (0.6) 7.7 (5.5)
1996 vs. 1995 7.1 (1.4) 10.8 (2.3)
Hospital Products Segment
1998 vs. 1997 11.9 (1.5) 13.4 -
1997 vs. 1996 14.4 (1.8) 16.2 -
1996 vs. 1995 9.1 (2.1) 11.2 -
Ross Products Segment
1998 vs. 1997 (1.6) 0.9 (2.5) -
1997 vs. 1996 (2.5) (0.4) (2.1) -
1996 vs. 1995 0.7 (0.3) 1.0 -
International Segment
1998 vs. 1997 3.1 1.4 9.5 (7.8)
1997 vs. 1996 6.4 0.4 12.8 (6.8)
1996 vs. 1995 8.9 0.6 12.3 (4.0)
Abbott Laboratories and Subsidiaries
FINANCIAL REVIEW (CONTINUED)
Chemical & Agricultural Products Segment
1998 vs. 1997 6.0 (0.7) 6.7 -
1997 vs. 1996 19.6 0.2 19.4 -
1996 vs. 1995 12.9 1.1 11.8 -
Sales of new products in 1998 are estimated to be $885 million, led by the
Diagnostics, International and Hospital products segments. Increases, as
disclosed in Note 13, in anti-infectives and infant formula sales in 1996 and
1997 and increases in adult nutritionals in 1996, 1997 and 1998 were primarily
due to unit increases. Decreases in anti-infectives and infant formula sales in
1998 were due primarily to unit decreases.
The Company holds patents on Hytrin in the United States and several major
markets throughout the world. The Company is facing a number of patent
challenges from generic manufacturers in the United States, and the ultimate
outcome of this litigation cannot be predicted with certainty. However, the
Company does not expect a generic form of Hytrin to become available before the
end of the second quarter of 1999. The Company believes generic competition
would adversely impact sales of Hytrin. In 1998, the Company recorded U.S.
sales of Hytrin of $542 million.
On July 27, 1998, the Company announced that it was experiencing
manufacturing difficulties with the capsule formulation of its protease
inhibitor Norvir. The manufacturing difficulties with Norvir will result in
shortages and interruption of the supply of capsules. The Company is supplying
Norvir liquid formulation to provide continued Norvir therapy for patients. In
1998, the Company recorded sales of Norvir of $250 million. The Company is
unable to quantify the effect that the production problems will have on sales in
future periods.
OPERATING EARNINGS
Gross profit margins (sales less cost of products sold, including freight and
distribution expenses) were 56.8 percent of net sales in 1998, 57.5 percent in
1997, and 57.0 percent in 1996. The decrease in the gross profit margin in 1998
was caused by unfavorable product mix, primarily slower sales of pharmaceutical
products, and the negative effect of a relatively stronger U.S. dollar. The
increases in the gross profit margins in 1997 and 1996 were due primarily to
favorable product mix, especially higher sales of pharmaceuticals, price and
productivity improvements, partially offset by higher project expenses for new
products, higher manufacturing capacity costs for anticipated unit growth, and
the effects of inflation and competitive pricing pressures in some product
lines. Gross profit margins in 1997 and 1996 were also unfavorably affected by
the relatively stronger U.S. dollar. In the U.S., states receive price rebates
from manufacturers of infant formula under the federally subsidized Special
Supplemental Food Program for Women, Infants, and Children (WIC). There are
also similar rebate programs for pharmaceutical products. These rebate programs
continue to have a negative effect on the gross profit margins of the Ross and
Pharmaceutical products segments.
In late 1998, the U.S. Food and Drug Administration (FDA) suspended its
approval of the release of production lots of the Company's pharmaceutical
product Abbokinase due to Current Good Manufacturing Practice concerns raised by
the FDA following inspections of the Company and its raw material supplier. In
January 1999, after the Company revised the product's labeling to add additional
warnings and the FDA issued a health care provider information sheet, the FDA
released certain lots that were under its review. The FDA subsequently
established new criteria for the release of additional lots. The Company is
instituting changes to its procedures in response to the FDA. The Company
cannot predict whether these changes will resolve FDA's concerns or the effect
of this matter on future sales of Abbokinase. During 1998, Abbott sold
approximately $277 million of Abbokinase, primarily in the United States.
Abbott Laboratories and Subsidiaries
FINANCIAL REVIEW (CONTINUED)
Research and development expense decreased to $1.2 billion in 1998 and
represented 9.8 percent of net sales in 1998, compared to 11.0 percent of net
sales in 1997, and 10.9 percent of net sales in 1996. The decrease in
research and development expenses in 1998 was due, in part, to higher charges
in 1997 for the acquisition of certain technologies in conjunction with
business acquisitions and strategic alliances. Research and development
expenditures continue to be concentrated on pharmaceutical and diagnostic
products.
Selling, general and administrative expenses increased 2.2 percent in
1998, net of the favorable effect of the relatively stronger U.S. dollar of
2.8 percent, compared to increases of 9.2 percent in 1997, and 10.3 percent
in 1996. The net increases, exclusive of exchange impact, reflect inflation,
additional selling and marketing support for new and existing products, and
litigation charges.
INTEREST (INCOME) EXPENSE, NET
Net interest expense increased in 1998, 1997 and 1996 due primarily to a higher
level of borrowings as a result of business acquisitions. As a result of the
suspension of the common share purchase program, it is expected that the level
of borrowings will decrease in 1999.
TAXES ON EARNINGS
The Company's effective income tax rates were 28.0 percent in 1998, 29.0 percent
in 1997 and 29.5 percent in 1996. The tax rates for 1998 and 1997 were reduced
primarily due to the extension of the research and development tax credit
through June 30, 1999. In addition, all three years' tax rates were unfavorably
impacted by the reduction in tax incentive grants for Puerto Rico operations.
Abbott Laboratories and Subsidiaries
FINANCIAL REVIEW (CONTINUED)
FINANCIAL CONDITION
CASH FLOW
The Company expects positive cash flow from operating activities to continue to
approximate or exceed the Company's capital expenditures and cash dividends.
DEBT AND CAPITAL
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 $2.5
billion at December 31, 1998. These lines of credit support domestic commercial
paper borrowing arrangements.
The Company may issue up to $750 million of senior debt securities in the
future under a registration statement filed with the Securities and Exchange
Commission in 1998.
During the last three years, the Company purchased 90,897,000 of its common
shares at a cost of $2.7 billion. In December 1998, the Company suspended
purchases of its common shares and currently has no plans to resume purchases in
1999.
FINANCIAL CONDITION
At December 31, 1998, 1997 and 1996 working capital was $591 million, $4 million
and $137 million, respectively. The decrease in working capital in 1997 was
partially due to increased short-term commercial paper borrowings which funded
long-term asset acquisitions.
CAPITAL EXPENDITURES
Capital expenditures of $991 million in 1998, $1.0 billion in 1997 and
$949 million in 1996 were principally for upgrading and expanding manufacturing,
research and development and administrative support facilities in all segments
and for laboratory instruments and hospital equipment placed with customers.
This level of capital expenditures is expected to continue, with an increased
proportion dedicated to the Hospital, International and Diagnostic products
segments.
BUSINESS ACQUISITIONS
In 1998, the Company acquired the common stock of International Murex
Technologies Corporation, a manufacturer of medical diagnostic products, for
approximately $234 million in cash. A substantial portion of the purchase
price was allocated to goodwill, which will be amortized on a straight-line
basis over 20 years. In 1997, the Company acquired certain parenteral
products businesses of Sanofi Pharmaceuticals, Inc., for approximately $200
million in cash. A substantial portion of the purchase price was allocated
to goodwill, which will be amortized on a straight-line basis over 15 years.
In 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. Goodwill of approximately $219 million
will be amortized on a straight-line basis over 32 years and other intangible
assets of $635 million, including trade names, patient base and acquired
technology, will be amortized on a straight-line basis over approximately 30
years. Purchased in-process research and development of $37 million was
charged against earnings. Had these acquisitions taken place on January 1 of
the previous years, consolidated sales and income would not have been
significantly different from reported amounts.
Abbott Laboratories and Subsidiaries
FINANCIAL REVIEW (CONTINUED)
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 state level 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.
RECENTLY ISSUED ACCOUNTING STANDARD
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative Instruments
and Hedging Activities." This statement requires the recognition of the fair
value of derivatives as either assets or liabilities. The statement is
effective for fiscal years beginning after June 15, 1999. Adoption of the
provisions of this statement will not have a material effect on the financial
statements of the Company.
YEAR 2000
The Year 2000 ("Y2K") issue results from the inability of some computer programs
to identify the year 2000 properly, potentially leading to errors or system
failure.
The Company has organized its efforts to resolve the Y2K issue as follows:
internal information systems; landlord and embedded systems; electronic products
currently marketed or in the field; and suppliers providing products and
services to the Company. Progress goals have been established in each area.
Internal information systems were inventoried and assessed, and remediation
started in 1992. Virtually all remediation has been completed. Eighty-one
percent of testing has been completed and all testing is scheduled to be
completed by mid-1999. Current progress is slightly better than plan.
Landlord and embedded systems were inventoried and Y2K assessment completed
by May 1998. The Company's goal is to resolve all critical systems by July
1999. Current progress is better than plan.
The Company has assessed the ability of its medical electronic and software
products to cope with the Y2K issue. Except for certain products distributed by
Murex, customers may access the Company's assessment on the Company's Web site.
For the recently acquired Murex product line, a referral source for customers to
contact the manufacturer is provided on the Web site. Most of the Company's
products are not affected by the Y2K issue. For those products requiring
remediation, the Company's goal is to provide solutions by June 1999. Current
progress is according to plan.
Beginning in March 1998, key suppliers were requested to certify that
they were Y2K compliant or, if not, to provide their plans to become
compliant. Eighty-six percent of suppliers responded; 54 percent of those
responding certified compliance currently and 46 percent forwarded action
plans. Follow-up with all key suppliers is being conducted according to plan.
Abbott Laboratories and Subsidiaries
FINANCIAL REVIEW (CONTINUED)
Each of the above areas began developing business continuity plans during
1998, and will complete development of those plans by September 30, 1999.
The most likely worst-case Y2K scenarios are subject to a wide range of
speculation. However, the business continuity plans will assume Y2K failures
are primarily third party, are intermittent, are of relatively short duration,
or are localized at one site or region, primarily outside the United States.
The Company's policy is to expense Y2K remediation costs as incurred. Y2K
remediation costs from inception through the end of 1999 are expected to
approximate $100 million, of which approximately one-third is expected to be
spent in 1999.
EURO CONVERSION
On January 1, 1999, the European Economic and Monetary Union took effect and
introduced the euro as the official single currency of the eleven participating
member countries. On that date the currency exchange rates of the participating
countries were fixed against the euro. There will be a three-year transition to
the euro, and at the end of 2001, the legacy currencies will be eliminated. In
1997, the Company organized an internal cross-functional task force to address
the euro issues and expects to be ready for the full conversion to the euro.
Costs required to prepare for the euro are not material to the Company's
financial position, results of operations or cash flows. The impact, if any, of
the euro on the Company's competitive position is unknown.
PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995 -- A CAUTION CONCERNING
FORWARD-LOOKING STATEMENTS
Under the safe harbor provisions of the Private Securities Litigation Reform Act
of 1995, the Company cautions investors that any forward-looking statements or
projections made by the Company, including those made in this document, are
subject to risks and uncertainties that may cause actual results to differ
materially from those projected. Economic, competitive, governmental,
technological and other factors that may affect the Company's operations are
discussed in Exhibit 99.1 to the Annual Report on Form 10-K.
Abbott Laboratories and Subsidiaries
SUMMARY OF SELECTED FINANCIAL DATA
Year Ended December 31
(dollars in millions except per share data)
1998 1997 1996 1995 1994
--------- -------- -------- -------- -------
Summary of Operations:
Net Sales. . . . . . . . . . . . . . . . . . . $ 12,477.8 11,883.5 11,013.5 10,012.2 9,156.0
Cost of products sold. . . . . . . . . . . . . $ 5,394.4 5,045.7 4,732.0 4,325.8 3,993.8
Research and development . . . . . . . . . . . $ 1,221.6 1,302.4 1,204.8 1,072.7 963.5
Selling, general and administrative. . . . . . $ 2,743.9 2,685.0 2,459.6 2,230.7 2,054.5
Operating earnings . . . . . . . . . . . . . . $ 3,117.9 2,850.4 2,617.1 2,382.9 2,144.2
Interest expense . . . . . . . . . . . . . . . $ 159.8 134.6 95.4 69.5 49.7
Interest income. . . . . . . . . . . . . . . . $ (55.7) (47.7) (44.5) (51.8) (36.9)
Other (income) expense, net. . . . . . . . . . $ (226.8) (186.3) (103.4) (30.2) (35.3)
Earnings before taxes. . . . . . . . . . . . . $ 3,240.6 2,949.9 2,669.6 2,395.3 2,166.7
Taxes on earnings. . . . . . . . . . . . . . . $ 907.4 855.5 787.5 706.6 650.0
Net earnings . . . . . . . . . . . . . . . . . $ 2,333.2 2,094.5 1,882.0 1,688.7 1,516.7
Basic earnings per common share. . . . . . . . $ 1.53 1.36 1.20 1.06 .93
Diluted earnings per common share. . . . . . . $ 1.51 1.34 1.19 1.05 .92
Financial Position:
Working capital. . . . . . . . . . . . . . . . $ 591.0 3.7 137.2 436.4 400.5
Investment securities maturing after one year. $ 783.8 631.0 665.6 422.5 316.2
Net property and equipment . . . . . . . . . . $ 4,738.8 4,569.7 4,461.5 4,249.5 3,920.9
Total assets . . . . . . . . . . . . . . . . . $ 13,216.2 12,061.1 11,125.6 9,412.6 8,523.7
Long-term debt . . . . . . . . . . . . . . . . $ 1,339.7 938.0 932.9 435.2 287.1
Shareholders' investment.. . . . . . . . . . . $ 5,713.7 4,998.7 4,820.2 4,396.8 4,049.4
Return on shareholders' investment . . . . . . % 43.6 42.7 40.8 40.0 39.3
Book value per share . . . . . . . . . . . . . $ 3.77 3.27 3.11 2.79 2.52
Other Statistics:
Gross profit margin. . . . . . . . . . . . . . % 56.8 57.5 57.0 56.8 56.4
Research and development to net sales. . . . . % 9.8 11.0 10.9 10.7 10.5
Net cash from operating activities . . . . . . $ 2,732.9 2,628.8 2,382.1 1,965.6 2,212.1
Capital expenditures . . . . . . . . . . . . . $ 990.6 1,007.3 949.0 947.0 929.5
Cash dividends declared per common share . . . $ .60 .54 .48 .42 .38
Common shares outstanding (in thousands) . . . 1,516,063 1,528,188 1,548,898 1,574,614 1,606,560
Number of common shareholders. . . . . . . . . 107,209 102,981 99,513 89,831 86,324
Number of employees. . . . . . . . . . . . . . 56,236 54,487 52,817 50,241 49,464
Sales per employee (in dollars). . . . . . . . $ 221,884 218,097 208,521 199,283 185,105
Market price per share-high. . . . . . . . . . $ 50 1/16 34 5/8 28 11/16 22 3/8 17
Market price per share-low . . . . . . . . . . $ 32 1/2 24 7/8 19 1/16 15 5/16 12 11/16
Market price per share-close . . . . . . . . . $ 49 32 3/4 25 3/8 20 13/16 16 5/16
Abbott Laboratories and Subsidiaries
SUMMARY OF SELECTED FINANCIAL DATA (CONTINUED)
Year Ended December 31
(dollars in millions except per share data)
1993 1992 1991 1990 1989
--------- ------- ------- ------- -------
Summary of Operations:
Net Sales. . . . . . . . . . . . . . . . . . . $ 8,407.8 7,851.9 6,876.6 6,158.7 5,379.8
Cost of products sold. . . . . . . . . . . . . $ 3,684.7 3,505.3 3,140.0 2,910.1 2,556.7
Research and development . . . . . . . . . . . $ 881.0 772.4 666.3 567.0 501.8
Selling, general and administrative. . . . . . $ 1,988.2 1,833.2 1,513.3 1,275.6 1,100.2
Operating earnings . . . . . . . . . . . . . . $ 1,924.0 1,526.0 1,557.0 1,406.0 1,221.1
Interest expense . . . . . . . . . . . . . . . $ 54.3 53.0 63.8 91.4 74.4
Interest income. . . . . . . . . . . . . . . . $ (37.8) (42.3) (45.1) (51.6) (73.8)
Other (income) expense, net. . . . . . . . . . $ (35.7) 48.5 (5.9) 15.5 26.3
Earnings before taxes. . . . . . . . . . . . . $ 1,943.2 1,738.8 1,544.2 1,350.7 1,194.2
Taxes on earnings. . . . . . . . . . . . . . . $ 544.1 499.7 455.5 384.9 334.4
Net earnings . . . . . . . . . . . . . . . . . $ 1,399.1 1,239.1 1,088.7 965.8 859.8
Basic earnings per common share. . . . . . . . $ .84 .73 .64 .56 .48
Diluted earnings per common share. . . . . . . $ .84 .73 .63 .55 .47
Financial Position:
Working capital. . . . . . . . . . . . . . . . $ 490.6 449.2 661.7 460.0 719.2
Investment securities maturing after one year. $ 221.8 270.6 340.2 314.0 300.0
Net property and equipment . . . . . . . . . . $ 3,511.0 3,099.2 2,662.1 2,375.8 2,090.2
Total assets . . . . . . . . . . . . . . . . . $ 7,688.6 6,941.2 6,255.3 5,563.2 4,851.6
Long-term debt . . . . . . . . . . . . . . . . $ 306.8 110.0 125.1 134.8 146.7
Shareholders' investment . . . . . . . . . . . $ 3,674.9 3,347.6 3,203.0 2,833.6 2,726.4
Return on shareholders' investment . . . . . . % 39.8 37.8 36.1 34.7 33.1
Book value per share . . . . . . . . . . . . . $ 2.24 2.00 1.88 1.65 1.54
Other Statistics:
Gross profit margin. . . . . . . . . . . . . . % 56.2 55.4 54.3 52.7 52.5
Research and development to net sales. . . . . % 10.5 9.8 9.7 9.2 9.3
Net cash from operating activities . . . . . . $ 1,846.9 1,388.8 1,453.2 1,200.9 959.9
Capital expenditures . . . . . . . . . . . . . $ 952.7 1,007.2 732.8 629.5 501.5
Cash dividends declared per common share . . . $ .34 .30 .25 .21 .17
Common shares outstanding (in thousands) . . . 1,642,260 1,672,104 1,701,060 1,716,564 1,769,916
Number of common shareholders. . . . . . . . . 82,947 75,703 56,541 49,827 45,361
Number of employees. . . . . . . . . . . . . . 49,659 48,118 45,694 43,770 40,929
Sales per employee (in dollars). . . . . . . . $ 169,312 163,180 150,492 140,706 131,441
Market price per share-high. . . . . . . . . . $ 15 7/16 17 1/16 17 3/8 11 9/16 8 13/16
Market price per share-low . . . . . . . . . . $ 11 5/16 13 1/16 9 13/16 7 13/16 5 3/4
Market price per share-close . . . . . . . . . $ 14 13/16 15 3/16 17 3/16 11 1/4 8 1/2
Abbott Laboratories and Subsidiaries
SUMMARY OF SELECTED FINANCIAL DATA (CONTINUED)
Year Ended December 31
(dollars in millions except per share data)
1988
----------
Summary of Operations:
Net Sales. . . . . . . . . . . . . . . . . . . . . . . $ 4,937.0
Cost of products sold. . . . . . . . . . . . . . . . . $ 2,353.2
Research and development . . . . . . . . . . . . . . . $ 454.6
Selling, general and administrative. . . . . . . . . . $ 1,027.2
Operating earnings . . . . . . . . . . . . . . . . . . $ 1,102.0
Interest expense . . . . . . . . . . . . . . . . . . . $ 85.0
Interest income. . . . . . . . . . . . . . . . . . . . $ (69.4)
Other (income) expense, net. . . . . . . . . . . . . . $ 30.9
Earnings before taxes. . . . . . . . . . . . . . . . . $ 1,055.5
Taxes on earnings. . . . . . . . . . . . . . . . . . . $ 303.5
Net earnings . . . . . . . . . . . . . . . . . . . . . $ 752.0
Basic earnings per common share. . . . . . . . . . . . $ .42
Diluted earnings per common share. . . . . . . . . . . $ .41
Financial Position:
Working capital. . . . . . . . . . . . . . . . . . . . $ 913.3
Investment securities maturing after one year. . . . . $ 285.7
Net property and equipment . . . . . . . . . . . . . . $ 1,952.6
Total assets . . . . . . . . . . . . . . . . . . . . . $ 4,825.1
Long-term debt . . . . . . . . . . . . . . . . . . . . $ 349.3
Shareholders' investment . . . . . . . . . . . . . . . $ 2,464.6
Return on shareholders' investment . . . . . . . . . . % 33.0
Book value per share . . . . . . . . . . . . . . . . . $ 1.37
Other Statistics:
Gross profit margin. . . . . . . . . . . . . . . . . . % 52.3
Research and development to net sales. . . . . . . . . % 9.2
Net cash from operating activities . . . . . . . . . . $ 965.4
Capital expenditures . . . . . . . . . . . . . . . . . $ 521.2
Cash dividends declared per common share . . . . . . . $ .15
Common shares outstanding (in thousands) . . . . . . . 1,798,768
Number of common shareholders. . . . . . . . . . . . . 46,324
Number of employees. . . . . . . . . . . . . . . . . . 38,751
Sales per employee (in dollars). . . . . . . . . . . . $ 127,403
Market price per share-high. . . . . . . . . . . . . . $ 6 9/16
Market price per share-low . . . . . . . . . . . . . . $ 5 3/8
Market price per share-close . . . . . . . . . . . . . $ 6