1
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
- --------------------------------------------------------------------------------
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 29, 2000.........................
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934.
FOR THE QUARTER ENDED COMMISSION FILE NUMBER
SEPTEMBER 29, 2000 1-10269
ALLERGAN, INC.
A DELAWARE CORPORATION IRS EMPLOYER IDENTIFICATION
95-1622442
2525 DUPONT DRIVE, IRVINE, CALIFORNIA 92612
TELEPHONE NUMBER 714/246-4500
Indicate by a check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
(1) X yes no
------ ------
(2) X yes no
------ ------
Indicate the number of shares outstanding of each of the issuer's classes of
common stock as of the latest practicable date.
As of November 3, 2000, there were 131,490,965 shares of common stock
outstanding.
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ALLERGAN, INC.
FORM 10-Q FOR THE QUARTER ENDED SEPTEMBER 29, 2000
INDEX
Page
----
PART I - FINANCIAL INFORMATION
ITEM 1 - CONSOLIDATED FINANCIAL STATEMENTS
(A) Condensed Consolidated Statements of Earnings - 3
Three Months and Nine Months Ended
September 29, 2000 and September 24, 1999
(B) Condensed Consolidated Balance Sheets - 4
September 29, 2000 and December 31, 1999
(C) Condensed Consolidated Statements of Cash Flows -
Nine Months Ended September 29, 2000 and
September 24, 1999 5
(D) Notes to Condensed Consolidated
Financial Statements 6-11
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS 12-15
ITEM 3 - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT
MARKET RISK 16-17
CERTAIN FACTORS AND TRENDS AFFECTING ALLERGAN AND
ITS BUSINESSES 18-20
PART II - OTHER INFORMATION
ITEM 5 - OTHER INFORMATION 21
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K 21
Signature 22
Exhibits
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PART I - FINANCIAL INFORMATION
Allergan, Inc.
Condensed Consolidated Statements of Earnings
(In millions, except per share amounts)
Three Months Ended Nine Months Ended
---------------------------- -----------------------------
September 29, September 24, September 29, September 24,
2000 1999 2000 1999
------------- ------------- ------------- -------------
Product Sales
Net sales $ 381.6 $ 346.8 $ 1,161.9 $ 1,025.9
Cost of sales 104.6 101.9 320.2 305.1
-------- -------- --------- ---------
Product gross margin 277.0 244.9 841.7 720.8
Research Services
Research service revenues,
primarily from a
related party 15.1 11.9 44.5 32.8
Cost of research services 14.2 11.0 42.0 30.6
-------- -------- --------- ---------
Research services margin 0.9 0.9 2.5 2.2
Operating costs and expenses
Selling, general and
administrative 156.4 135.7 490.1 432.1
Research and development 47.8 44.5 145.2 114.4
Technology fees from
related party (0.8) (1.6) (2.5) (5.0)
-------- -------- --------- ---------
Operating income 74.5 67.2 211.4 181.5
Nonoperating income (expense)
Interest income 5.2 3.0 14.0 10.1
Interest expense (4.5) (3.6) (14.9) (10.1)
Gain on investments, net 0.2 0.2 0.9 2.3
Other, net (0.1) 0.4 0.3 0.4
-------- -------- --------- ---------
0.8 -- 0.3 2.7
-------- -------- --------- ---------
Earnings before income taxes
and minority interest 75.3 67.2 211.7 184.2
Provision for income taxes 20.5 20.2 61.4 55.3
Minority interest 0.2 -- 0.3 --
-------- -------- --------- ---------
Net earnings $ 54.6 $ 47.0 $ 150.0 $ 128.9
======== ======== ========= =========
Basic earnings per share $ 0.42 $ 0.36 $ 1.15 $ 0.97
======== ======== ========= =========
Diluted earnings per share $ 0.41 $ 0.35 $ 1.12 $ 0.95
======== ======== ========= =========
See accompanying notes to condensed consolidated financial statements.
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Allergan, Inc.
Condensed Consolidated Balance Sheets
(In millions, except share data)
September 29, December 31,
2000 1999
------------- ------------
ASSETS
Current assets:
Cash and equivalents $ 378.9 $ 162.9
Trade receivables, net 278.1 253.2
Inventories 121.6 130.7
Other current assets 126.6 150.7
-------- --------
Total current assets 905.2 697.5
Investments and other assets 156.1 160.8
Property, plant and equipment, net 339.0 330.3
Goodwill and intangibles, net 138.5 150.5
-------- --------
Total assets $1,538.8 $1,339.1
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable $ 86.2 $ 85.3
Accounts payable 83.1 80.5
Accrued expenses 169.8 170.7
Income taxes 74.5 83.4
-------- --------
Total current liabilities 413.6 419.9
Long-term debt 260.5 208.8
Other liabilities 81.4 75.8
Commitments and contingencies -- --
Minority interest 0.4 0.1
Stockholders' equity:
Preferred stock, $.01 par value; authorized
5,000,000 shares; none issued -- --
Common stock, $.01 par value; authorized
300,000,000 shares; issued 134,255,000 1.3 1.3
Additional paid-in capital 275.9 245.5
Accumulated other comprehensive loss (54.7) (49.3)
Retained earnings 736.6 651.1
-------- --------
959.1 848.6
Less - treasury stock, at cost
(3,215,000 and 4,436,000 shares) (176.2) (214.1)
-------- --------
Total stockholders' equity 782.9 634.5
-------- --------
Total liabilities and
stockholders' equity $1,538.8 $1,339.1
======== ========
See accompanying notes to condensed consolidated financial statements.
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Allergan, Inc.
Condensed Consolidated Statements of Cash Flows
(In millions)
Nine Months Ended
----------------------------
September 29, September 24,
2000 1999
------------- -------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings $ 150.0 $ 128.9
Non-cash items included in net earnings:
Depreciation and amortization 57.7 51.9
Amortization of prepaid royalties 5.5 6.8
Gain on investments, net (0.9) (2.3)
Deferred income taxes 4.3 (4.0)
Loss (gain) on disposal of assets 0.9 (0.2)
Expense of compensation plans 6.1 8.2
Adjustment in reporting foreign subsidiaries (3.2) (2.6)
Minority interest 0.3 --
Changes in assets and liabilities:
Trade receivables (36.9) (20.7)
Inventories 6.9 (3.5)
Accounts payable 2.3 12.3
Accrued liabilities 7.6 (2.6)
Income taxes 17.1 36.0
Other 11.0 3.0
------- -------
Net cash provided by operating activities 228.7 211.2
------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property, plant and equipment (43.2) (39.1)
Disposals of property, plant and equipment 0.6 7.7
Proceeds from sale of investments 2.6 8.6
Other, net (10.6) (29.1)
------- -------
Net cash used in investing activities (50.6) (51.9)
------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Dividends to stockholders (31.4) (27.8)
Net borrowings under commercial
paper obligations 68.6 44.3
Net (repayments) borrowings of notes payable (5.9) 1.1
Sale of stock to employees 128.7 24.0
Increase in long-term debt -- 17.4
Decrease in long-term debt (1.9) (1.8)
Payments to acquire treasury stock (122.8) (125.2)
------- -------
Net cash provided by (used in)
financing activities 35.3 (68.0)
------- -------
Effect of exchange rates on cash and equivalents 2.6 (8.0)
------- -------
Net increase in cash and equivalents 216.0 83.3
Cash and equivalents at beginning of period 162.9 181.6
------- -------
Cash and equivalents at end of period $ 378.9 $ 264.9
======= =======
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the nine months ended for
Interest (net of capitalization) $ 13.0 $ 7.6
======= =======
Income taxes $ 31.2 $ 24.1
======= =======
See accompanying notes to condensed consolidated financial statements.
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Allergan, Inc.
Notes to Condensed Consolidated Financial Statements
1. In the opinion of management, the accompanying unaudited condensed
consolidated financial statements contain all adjustments necessary (consisting
only of normal recurring accruals) to present fairly the financial information
contained therein. These statements do not include all disclosures required by
accounting principles generally accepted in the United States of America and
should be read in conjunction with the audited financial statements of the
Company for the year ended December 31, 1999. The results of operations for the
nine months ended September 29, 2000 are not necessarily indicative of the
results to be expected for the year ending December 31, 2000.
2. In December 1999, the United States Securities and Exchange Commission issued
Staff Accounting Bulletin (SAB) No. 101 - "Revenue Recognition in Financial
Statements," as amended, effective October 1, 2000. SAB No. 101 summarizes
certain of the staff's views in applying generally accepted accounting
principles to revenue recognition in financial statements. The Company has
implemented SAB No. 101 and there was no material impact on its financial
statements.
3. On October 21, 1999, the Company's Board of Directors approved a two for one
stock split in the form of a 100% stock dividend, effective on December 9, 1999.
All share and per share data reflects the split. Additionally, at the Annual
Meeting on April 26, 2000, the stockholders approved an amendment to the
Company's Certificate of Incorporation to increase the aggregate number of
common stock shares authorized from 150,000,000 to 300,000,000.
4. Components of inventories were:
September 29, December 31,
2000 1999
------------- ------------
(in millions)
Finished goods $ 80.9 $ 87.5
Work in process 23.2 13.3
Raw materials 17.5 29.9
------ ------
Total $121.6 $130.7
====== ======
5. Income taxes are determined using an estimated annual effective tax rate,
which is less than the U.S. Federal statutory rate, primarily because of lower
tax rates in Puerto Rico and in certain non U.S. jurisdictions. Withholding and
U.S. taxes have not been provided for unremitted earnings of certain non U.S.
subsidiaries because such earnings are or will be reinvested in operations
outside the United States, or will be offset by appropriate credits for foreign
income taxes paid. The estimated tax rate was revised in the third quarter,
2000, to reflect management's estimate of the effective tax rate for the year.
6. The Company is involved in various litigation and claims arising in the
normal course of business. The Company's management believes that the ultimate
disposition of any of the currently pending lawsuits would not have a material
adverse effect on the consolidated financial position and results of operations
of the Company.
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Allergan, Inc.
Notes to Condensed Consolidated Financial Statements (Continued)
7. On October 20, 2000, the Board of Directors declared a quarterly cash
dividend of $0.08 per share, payable December 8, 2000 to stockholders of record
on November 17, 2000.
8. The following table presents the computation of basic and diluted earnings
per share:
Third Quarter
-------------------------------------------------------------------------------------
2000 1999
(In millions, ---------------------------------------- ----------------------------------------
except per share Income Shares Per-Share Income Shares Per-Share
data) (Numerator) (Denominator) Amount (Numerator) (Denominator) Amount
----------- ------------- --------- ----------- ------------- ---------
Computation of basic EPS:
Income available to
common stockholders $ 54.6 131.2 $0.42 $ 47.0 131.9 $0.36
===== =====
Effect of dilutive
options 3.0 3.0
----- -----
Computation of diluted EPS:
Income available to
common stockholders
assuming exercises $ 54.6 134.2 $0.41 $ 47.0 134.9 $0.35
===== ===== ===== =====
Nine Months
-------------------------------------------------------------------------------------
2000 1999
(In millions, ---------------------------------------- ----------------------------------------
except per share Income Shares Per-Share Income Shares Per-Share
data) (Numerator) (Denominator) Amount (Numerator) (Denominator) Amount
----------- ------------- --------- ----------- ------------- ---------
Computation of basic EPS:
Income available to
common stockholders $150.0 130.4 $1.15 $128.9 132.6 $0.97
===== =====
Effect of dilutive
options 3.1 3.1
----- -----
Computation of diluted EPS:
Income available to
common stockholders
assuming exercises $150.0 133.5 $1.12 $128.9 135.7 $0.95
===== ===== ===== =====
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Allergan, Inc.
Notes to Condensed Consolidated Financial Statements (Continued)
Options to purchase 6,800 shares of common stock at an exercise price of $75.13
per share were outstanding at September 29, 2000. Additionally, options to
purchase 2,200,000 shares of common stock at an exercise price of $55.00 were
outstanding as of September 24, 1999. The 6,800 options at September 29, 2000
and the 2,200,000 options at September 24, 1999 were not included in the
computation of diluted earnings per share at September 29, 2000 and September
24, 1999, respectively, because the effect would be antidilutive.
9. The following table summarizes components of comprehensive income for the
quarters and nine months ended:
Third Quarter
------------------------------------------------------------------------------------------
(in millions) 2000 1999
------------------------------------------- ------------------------------------------
Tax Tax
Before-tax (expense) Net-of-tax Before-tax (expense) Net-of-tax
amount or benefit amount amount or benefit amount
---------- --------- ---------- ---------- --------- ----------
Foreign currency
translation adjustments $(3.2) $ -- $(3.2) $(11.3) $ -- $(11.3)
Unrealized holding gains
(losses) arising during
period 4.9 (1.7) 3.2 (3.6) 1.3 (2.3)
Reclassification
adjustment for net gains
realized in net income -- -- -- (0.2) 0.1 (0.1)
----- ----- ----- ------ ----- -----
Other comprehensive
income (loss) $ 1.7 $(1.7) -- $(15.1) $ 1.4 (13.7)
===== ===== ======= =====
Net earnings 54.6 47.0
----- -----
Total comprehensive income $54.6 $33.3
===== =====
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Allergan, Inc.
Notes to Condensed Consolidated Financial Statements (Continued)
Nine Months Ended
-------------------------------------------------------------------------------------------
(in millions) September 29, 2000 September 24, 1999
-------------------------------------------- -----------------------------------------
Tax Tax
Before-tax (expense) Net-of-tax Before-tax (expense) Net-of-tax
amount or benefit amount amount or benefit amount
---------- ---------- ---------- ---------- ---------- ----------
Foreign currency
translation adjustments $ (8.7) $ -- $ (8.7) $(38.8) -- $(38.8)
Unrealized holding gains
arising during period 5.7 (2.0) 3.7 1.6 $(0.5) 1.1
Reclassification
adjustment for net gains
realized in net income (0.6) 0.2 (0.4) (2.3) 0.8 (1.5)
------ ------ ------ ------ ------ ------
Other
comprehensive loss $ (3.6) $ (1.8) (5.4) $(39.5) $ 0.3 (39.2)
====== ====== ====== ======
Net earnings 150.0 128.9
------ ------
Total comprehensive
income $144.6 $ 89.7
====== ======
10. Business Segment Information
The Company operates in Regions or geographic operating segments. In accordance
with SFAS No. 131, the United States information is presented separately as it
is the Company's headquarters country. U.S. sales represented 51.0% and 47.8% of
total product net sales for the quarters ended September 29, 2000 and September
24, 1999, respectively, and 52.1% and 48.7% of total product net sales for the
nine month periods ended September 29, 2000 and September 24, 1999,
respectively. No other country, or single customer, generates over 10% of total
product net sales. Operations for the Europe Region also include sales to
customers in Africa and the Middle East, and operations in the Asia Pacific
Region include sales to customers in Australia and New Zealand.
Operating income attributable to each operating segment is based upon the
management assignment of costs to such segments. Operating income was determined
for each operating segment using a cost of sales amount which included the
manufacturing standard cost of goods produced by the Company's manufacturing
operations (or the cost to acquire goods from third parties), freight, duty and
local distribution costs, royalties and charges for corporate services and asset
utilization.
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Allergan, Inc.
Notes to Condensed Consolidated Financial Statements (Continued)
Income from manufacturing operations is not assigned to geographic regions
because most manufacturing operations produce products for more than one region.
Research and Development costs are treated as general corporate costs.
Identifiable assets are assigned by region based upon management responsibility
for such items. Corporate assets are primarily cash and equivalents, goodwill
and intangibles, and long-term investments. Assets assigned to segments have not
changed materially since December 31, 1999.
GEOGRAPHIC OPERATING SEGMENTS
Net Sales Operating Income
--------------------------- -------------------------
3rd Qtr. 3rd Qtr. 3rd Qtr. 3rd Qtr.
(in millions) 2000 1999 2000 1999
-------- -------- ------- --------
United States $ 194.1 $ 164.2 $ 80.1 $ 70.0
Europe 81.9 89.9 22.9 28.7
Asia Pacific 62.1 55.6 17.1 5.7
Other 42.8 35.6 8.1 7.4
-------- -------- ------- -------
Segments total 380.9 345.3 128.2 111.8
Manufacturing operations 0.7 1.5 32.6 38.1
Research and development (47.8) (44.5)
Research services margin 0.9 0.9
Elimination of inter-
company profit (45.9) (52.2)
General corporate 6.5 13.1
-------- -------- ------- -------
Total $ 381.6 $ 346.8 $ 74.5 $ 67.2
======== ======== ======= =======
Net Sales Operating Income
-------------------------------- -------------------------------
Nine Months Ended Nine Months Ended
-------------------------------- -------------------------------
September 29, September 24, September 29, September 24,
(in millions) 2000 1999 2000 1999
------------- ------------- ------------- -------------
United States $ 602.0 $ 494.8 $ 256.1 $ 193.9
Europe 262.1 274.4 68.7 76.1
Asia Pacific 171.7 149.0 27.7 12.3
Other 123.3 102.8 19.4 20.0
-------- -------- ------- -------
Segments total 1,159.1 1,021.0 371.9 302.3
Manufacturing operations 2.8 4.9 100.1 99.9
Research and development (145.2) (114.4)
Research services margin 2.5 2.2
Elimination of inter-
company profit (142.4) (146.3)
General corporate 24.5 37.8
-------- -------- ------- -------
Total $1,161.9 $1,025.9 $ 211.4 $ 181.5
======== ======== ======= =======
11. Special Charges
The Company maintains specific current and non-current liabilities at September
29, 2000 for restructuring charges recognized in 1998 and 1996. For the three
and nine month periods ended September 29, 2000, the Company utilized
approximately $0.3 million and $3.6 million, respectively, of
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Allergan, Inc.
Notes to Condensed Consolidated Financial Statements (Continued)
accrued liabilities specific to both the 1998 and 1996 restructurings. This
spending is primarily associated with payments made to involuntarily terminated
employees related to continued workforce reductions in identified manufacturing
facilities. At September 29, 2000, the Company maintained approximately $8.8
million of accrued liabilities related to the 1998 and 1996 restructurings.
12. New and Proposed Accounting Standard
In June 1998, Statement of Financial Accounting Standards No. 133 - "Accounting
for Derivative Instruments and Hedging Activities" (SFAS No. 133) was issued, as
amended, and is effective for all periods of fiscal years beginning after June
15, 2000. SFAS No. 133 establishes accounting and reporting standards for
derivative instruments, including certain derivative instruments embedded in
other contracts, and for hedging activities. SFAS No. 133 requires that an
entity recognize all derivatives as either assets or liabilities in the
statement of financial position and measure those instruments at fair value. The
Company has not determined the impact that SFAS No. 133 will have on its
financial statements and believes that such determination will not be meaningful
until closer to the date of initial inception.
13. Subsequent Event
On November 1, 2000, the Company generated approximately $390 million in net
proceeds from the issuance of zero coupon convertible subordinated notes. The
notes are convertible into common stock and mature on November 1, 2020 at a
principal amount of approximately $657 million.
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ALLERGAN, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS FOR THE QUARTER ENDED SEPTEMBER 29, 2000
RESULTS OF OPERATIONS
The following table compares 2000 and 1999 net sales by Product Line for the
third quarter and year-to-date periods:
Three Months Ended Nine Months Ended
------------------------------ -------------------------------
Net Sales by Product Line September 29, September 24, September 29, September 24,
($ millions): 2000 1999 2000 1999
------------- ------------- ------------- -------------
Specialty pharmaceuticals
Eye Care Pharmaceuticals $ 161.6 $ 141.2 $ 514.6 $ 424.7
Skin Care 16.2 16.3 48.4 58.0
BOTOX(R)/Neuromuscular 60.7 43.1 172.8 121.9
------- ------- -------- --------
238.5 200.6 735.8 604.6
Medical devices and OTC
products
Ophthalmic Surgical 59.0 54.4 180.6 158.5
Contact Lens Care 84.1 91.8 245.5 262.8
------- ------- -------- --------
Total Net Sales $ 381.6 $ 346.8 $1,161.9 $1,025.9
======= ======= ======== ========
For the quarter ended September 29, 2000 total net sales increased by $34.8
million or 10% to $381.6 million as compared to the third quarter of 1999. Net
sales for the nine months ended September 29, 2000 were $1,161.9 million, a 13%
increase from the comparable 1999 amount.
The impact of foreign currency changes compared to the comparable prior year
period decreased net sales by $10.1 million or 3% for the quarter ended
September 29, 2000 and by $22.8 million or 2% for the nine months ended
September 29, 2000. At constant currency rates, sales increased $44.9 million or
13% during the quarter, and $158.8 million or 16% for the nine months ended
September 29, 2000 compared with the same periods last year.
Sales in the U.S. were 51.0% of total product net sales for the quarter ended
September 29, 2000, which represents a 3.2 percentage point increase over the
47.8% rate for the third quarter of 1999. For the nine months ended September
29, 2000, sales in the U.S. were 52.1% of total product net sales which
represents a 3.4 percentage point increase over the 48.7% rate for the first
nine months of 1999. The increase in the mix of U.S. sales as a percentage of
total product net sales was primarily attributable to the increase in U.S. Eye
Care Pharmaceutical sales.
Eye Care Pharmaceutical and Botox(R) Purified Neurotoxin Complex sales were
reduced from the amounts that would have been reported at constant currency
rates by $4.7 million and $1.1 million, respectively, in the third quarter and
by $12.5 million and $2.7 million, respectively, in the first nine months of
2000. This was primarily a result of the weakness in the Euro denominated
currencies in the third quarter as well as year-to-date through September 29,
2000.
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Allergan, Inc.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS FOR THE QUARTER ENDED SEPTEMBER 29, 2000 (Continued)
RESULTS OF OPERATIONS (Continued)
Ophthalmic Surgical and Contact Lens Care sales were reduced from the amounts
that would have been reported at constant currency rates by $1.5 million and
$2.8 million, respectively, in the third quarter and by $3.4 million and $4.2
million, respectively, in the first nine months of 2000. This was primarily a
result of the weakness in Euro denominated currencies partially offset by the
strengthening of the Japanese yen in 2000.
The $34.8 million increase in net sales in the third quarter and the $136.0
million increase in the first nine months of 2000 were primarily the result of
increases in sales in three product lines. Eye Care Pharmaceutical sales
increased by $20.4 million in the third quarter and $89.9 million in the first
nine months of 2000. Sales of Botox(R) Purified Neurotoxin Complex increased by
$17.6 million in the third quarter and $50.9 million in the first nine months of
2000. Surgical sales increased by $4.6 million in the third quarter and $22.1
million in the first nine months of 2000. Eye Care Pharmaceutical sales
increased primarily because of growth in sales of Alphagan(R) ophthalmic
solution. Botox(R) sales increased as a result of strong growth in both the
United States and international markets. Allergan believes it currently
possesses over 80 percent of the worldwide market for neurotoxins including
Botox(R). Later this year, a competitor is expected to introduce a competing
neurotoxin. While Allergan expects this new competition to cause the market for
neurotoxins to expand, the rate of growth for Botox(R) sales may decrease in the
future as a result of this new competition. Surgical sales increased primarily
as a result of strong sales of Allergan's acrylic IOL and increased sales of
silicone intraocular lenses (IOLs).
Allergan's gross margin percentage for the third quarter of 2000 was 72.6% of
net sales, which represents a 2.0 percentage point increase from the 70.6% rate
for the third quarter of 1999. The gross margin percentage for the nine months
ended September 29, 2000 was 72.4% of net sales, which represents a 2.1
percentage point increase from the 70.3% rate for the first nine months of 1999.
The gross margin percentage increased in 2000 compared to the comparable periods
in 1999 primarily as a result of shifts in the mix of products sold to higher
margin products. Higher margin Eye Care Pharmaceutical and Botox(R) Purified
Neurotoxin Complex sales represented a greater percentage of 2000 sales compared
to 1999. Gross margin in dollars increased over the third quarter of 1999 by
$32.1 million or 13% as a result of the 10% increase in net sales and the 2.0
percentage point increase in gross margin percentage. For the first nine months
of 2000 gross margin in dollars increased over the comparable period of 1999 by
$120.9 million or 17% as a result of the 13% increase in net sales and the 2.1
percentage point increase in gross margin percentage.
Operating income in the third quarter of 2000 of $74.5 million was $7.3 million,
or 11% higher than operating income in the third quarter of 1999 of $67.2
million. Such increase was the result of the $32.1 million
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14
Allergan, Inc.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS FOR THE QUARTER ENDED SEPTEMBER 29, 2000 (Continued)
RESULTS OF OPERATIONS (Continued)
increase in gross margin in the third quarter of 2000 offset by a $20.7 million
increase in selling, general and administrative expenses, and a $3.3 million
dollar increase in research and development. Operating income for the nine
months ended September 29, 2000 of $211.4 million was $29.9 million, or 16%
higher than operating income in the first nine months of 1999 of $181.5 million.
Such increase was the result of the $120.9 million increase in gross margin in
2000 offset by a $58.0 million increase in selling, general and administrative
expenses, and a $30.8 million increase in research and development. Selling,
general, and administrative expenses increased for the third quarter and for the
nine months ended September 29, 2000 primarily as a result of increases in
spending on promotion, selling and marketing activities in 2000. Research and
Development increased for the third quarter and for the nine months ended
September 29, 2000 as a result of increased research activity.
Provision for income taxes in the third quarter, 2000 decreased by 3% as a
percentage of earnings before income taxes and minority interest from the
comparable 1999 period. Similarly, the provision for income taxes for the nine
months ended September 29, 2000 decreased by 1% as a percentage of earnings
before income taxes and minority interest from the comparable 1999 period. The
decrease in both periods is the result of a revised estimated tax rate to
reflect management's estimate of the effective tax rate for the year ended
December 31, 2000.
Net earnings of $54.6 million in the third quarter of 2000 increased by $7.6
million or 16% over net earnings of $47.0 million for the third quarter of 1999.
Such increase was primarily the result of the $7.3 million increase in operating
income and the reduction in the effective tax rate in the third quarter.
Net earnings of $150.0 million in the first nine months of 2000 represent a
$21.1 million, or 16% increase over net earnings of $128.9 million in the first
nine months of 1999. The 2000 increase is primarily the result of the $29.9
million increase in operating income and a $2.7 million favorable change in the
effects of foreign exchange gains and losses. This was partially offset by a
$0.9 million increase in net interest expense, an increase in the loss on fixed
asset disposals of $1.1 million, a decrease in the gains on sales of investments
of $1.5 million, and a $6.1 million increase in income taxes resulting from the
increase in earnings before income tax.
LIQUIDITY AND CAPITAL RESOURCES
As of September 29, 2000, the Company had long-term credit facilities and a
medium term note program. The credit facilities allow for borrowings of up to
$62.1 million through 2001, $13.9 million through 2002, and $275.9 million
through 2003. The note program allows the Company to issue up to an additional
$35 million in notes on a non-revolving basis. Borrowings
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Allergan, Inc.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS FOR THE QUARTER ENDED SEPTEMBER 29, 2000
LIQUIDITY AND CAPITAL RESOURCES (Continued)
under the credit facilities are subject to certain financial and operating
covenants, including a requirement that the Company maintain certain financial
ratios, and other customary covenants for credit facilities of similar kind. As
of September 29, 2000, the Company had $100.1 million in borrowings under six of
the credit facilities, $89.0 million in borrowings under the note program, and
commercial paper borrowings of $116.5 million. As of September 29, 2000, the
Company has classified $116.5 million of commercial paper borrowings as
long-term debt based upon the Company's ability to maintain such debt under
terms of the credit facilities described above.
The net cash provided by operating activities for the nine months ended
September 29, 2000 was $228.7 million. The net cash provided by operating
activities for the nine months ended September 24, 1999 was $211.2 million.
The increase in net cash provided by operating activities of $17.5 million is
primarily the result of an increase in net earnings of $21.1 million.
Cash used in investing activities for the nine months ended September 29, 2000
was $50.6 million. Cash used in investing activities for the nine months ended
September 24, 1999 was $51.9 million. The Company invested $43.2 million in new
facilities and equipment during the nine months ended September 29, 2000
compared to $39.1 million during the same period in 1999.
Cash provided by financing activities was $35.3 million for the nine months
ended September 29, 2000 compared to cash used in financing activities of $68.0
million during the same period in 1999. The increase in net cash provided by
financing activities of $103.3 million is primarily the result of stock sold to
employees of $128.7 million. The Company is uncertain as to the level of future
stock purchases by employees. Commercial paper borrowings, net of repayments of
debt totaled $68.6 million for the nine months ended September 29, 2000 compared
to $44.3 million during the same period in 1999. The amounts in both years
include dividend outflows of $31.4 million in 2000 and $27.8 million in 1999.
The 2000 amount of cash provided by financing activities includes $122.8 million
used to repurchase treasury stock.
The Company believes that the net cash provided by operating activities,
supplemented as necessary with the $286.8 million of available borrowings under
the Company's existing credit facilities and approximately $390 million of net
proceeds generated from the issuance of zero coupon convertible subordinated
notes on November 1, 2000, will provide it with sufficient resources to meet
working capital requirements, debt service and other cash needs over the next
year. The Company believes it will spend approximately $8.8 million on accrued
restructuring costs during the remainder of 2000 and through 2001.
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ALLERGAN, INC.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
In the normal course of business, operations of the Company are exposed to risks
associated with fluctuations in interest rates and foreign currency exchange
rates. The Company addresses these risks through controlled risk management that
includes the use of derivative financial instruments to hedge or reduce these
exposures. The Company does not enter into financial instruments for trading or
speculative purposes.
To ensure the adequacy and effectiveness of the Company's interest rate and
foreign exchange hedge positions, the Company continually monitors its interest
rate swap positions and foreign exchange forward and option positions both on a
stand-alone basis and in conjunction with its underlying interest rate and
foreign currency exposures, respectively, from an accounting and economic
perspective. However, given the inherent limitations of forecasting and the
anticipatory nature of the exposures intended to be hedged, there can be no
assurance that such programs will offset more than a portion of the adverse
financial impact resulting from unfavorable movements in either interest or
foreign exchange rates. In addition, the timing of the accounting for
recognition of gains and losses related to mark-to-market instruments for any
given period may not coincide with the timing of gains and losses related to the
underlying economic exposures and, therefore, may adversely affect the Company's
consolidated operating results and financial position.
Interest Rate Risk
The Company's interest income and expense is most sensitive to fluctuations in
the general level of U.S. and Japan interest rates. Changes in U.S. and Japan
interest rates affect the interest earned on the Company's cash and equivalents,
interest expense on the Company's debt as well as costs associated with foreign
currency hedges.
The Company's exposure to market risk for changes in interest rates results from
the Company's long-term debt obligations and related derivative financial
instruments. The Company enters into interest rate swap agreements to reduce the
impact of interest rate changes on its floating rate long-term debt. These
derivative financial instruments allow the Company to make long-term borrowings
at floating rates and then swap them into fixed rates that are anticipated to be
lower than those available to the Company if fixed-rate borrowings were made
directly.
The Company's interest rate swaps qualify as accounting hedges and generally
require the Company to pay a fixed interest rate and receive a floating rate of
interest without exchanges of the underlying notional amounts. As a result,
these swaps effectively convert the Company's floating-rate debt to fixed rates
and generally qualify for hedge accounting treatment.
The impact of interest rate risk management activities on income during the
quarter ended September 29, 2000, and the amount of deferred gains and losses
from interest rate risk management transactions at September 29, 2000 were not
material.
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Allergan, Inc.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK (Continued)
Foreign Currency Risk
Overall, the Company is a net recipient of currencies other than the U.S. dollar
and, as such, benefits from a weaker dollar and is adversely affected by a
stronger dollar relative to major currencies worldwide. Accordingly, changes in
exchange rates, and in particular a strengthening of the U.S. dollar, may
negatively affect the Company's consolidated sales and gross margins as
expressed in U.S. dollars.
From time to time, the Company enters into foreign currency forward and option
contracts to reduce earnings and cash flow volatility associated with foreign
exchange rate changes to allow management to focus its attention on its core
business issues and challenges. Accordingly, the Company enters into various
contracts which change in value as foreign exchange rates change to offset the
effect of changes in the value of foreign currency assets and liabilities,
commitments and anticipated foreign currency denominated sales and operating
expenses. The Company enters into foreign currency forward and option contracts
in amounts between minimum and maximum anticipated foreign exchange exposures,
generally for periods not to exceed one year. The gains and losses on these
contracts offset changes in the value of the related exposures.
All of the Company's outstanding foreign exchange forward contracts were entered
into to protect the value of intercompany borrowings denominated in currencies
other than the lender's functional currency. These forward contracts qualify for
hedge accounting treatment. As such, gains and losses recognized upon settlement
of the forward contracts offset losses and gains, respectively, on the
underlying intercompany receivables being hedged.
Probable but not firmly committed transactions are comprised of sales of the
Company's products and purchases of raw material in currencies other than the
U.S. Dollar. A majority of these sales are made through the Company's
subsidiaries in Europe, Asia (particularly Japan), Canada and Australia. The
Company purchases foreign exchange forward and option contracts to hedge the
currency exchange risks associated with these probable but not firmly committed
transactions. The duration of foreign exchange hedging instruments, whether for
firmly committed transactions or for probable but not firmly committed
transactions, currently does not exceed one year.
All of the Company's purchased options were entered into to protect the value of
anticipated, but not firmly committed transactions in Japan, Europe, Australia
and Canada. The premium cost of purchased foreign exchange option contracts are
recorded in "Other Current Assets" and amortized over the life of the option.
In January 2001, the Company is required to adopt Statement of Financial
Accounting Standards No. 133 - "Accounting for Derivative Instruments and
Hedging Activities" (SFAS 133), as amended. The Company has not determined the
impact that SFAS No. 133 will have on its financial statements and believes that
such determination will not be meaningful until closer to the date of initial
adoption.
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ALLERGAN, INC.
CERTAIN FACTORS AND TRENDS AFFECTING ALLERGAN AND ITS BUSINESSES
Certain statements made by the Company in this report and in other reports and
statements released by the Company constitute "forward-looking statements"
within the meaning of the Private Securities Litigation Reform Act of 1995, such
as comments which express the Company's opinions about trends and factors which
may impact future operating results. Disclosures that use words such as the
Company "believes," "anticipates," "expects" and similar expressions are
intended to identify forward-looking statements. Such statements are subject to
certain risks and uncertainties that could cause actual results to differ
materially from expectations. Any such forward-looking statements, whether made
in this report or elsewhere, should be considered in context with the various
disclosures made by the Company about its businesses including, without
limitation, the factors discussed below.
o The pharmaceutical industry and other health care-related industries
continue to experience consolidation, resulting in larger, more diversified
companies with greater resources than the Company. Among other things,
these larger companies can spread their research and development costs over
much broader revenue bases than Allergan and can influence customer and
distributor buying decisions.
o The Company is currently the only manufacturer of an FDA-approved
neurotoxin. The Company is aware, however, of another company seeking FDA
approval of a neurotoxin. If such approval is granted, the Company's sales
of Botox(R) Purified Neurotoxin Complex could be materially and negatively
impacted.
o The manufacturing process to create bulk toxin raw material necessary to
produce Botox(R) Purified Neurotoxin Complex is technically complicated.
Any failure of the Company to maintain an adequate supply of bulk toxin and
finished product could result in an interruption in the supply of Botox(R)
Purified Neurotoxin Complex and a resulting decrease in sales of the
product.
o The Company's Contact Lens Care business continues to be impacted by trends
in the contact lens and lens care marketplace, including technological and
medical advances in surgical techniques for the correction of vision
impairment. Cheaper one-bottle chemical disinfection systems continue to
gain popularity among soft contact lens wearers instead of peroxide-based
lens care products which historically have been Allergan's strongest family
of lens care products. Also, the growing use and acceptance of daily
contact lenses, other frequent replacement lenses, and laser-correction
procedures, along with the other factors above, could have the effect of
reducing demand for lens care products generally. While the Company
believes it has established appropriate marketing and sales plans to
mitigate the impact of these trends upon its Contact Lens Care business, no
assurance can be given in this regard.
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Allergan, Inc.
CERTAIN FACTORS AND TRENDS AFFECTING ALLERGAN AND ITS BUSINESSES (Continued)
o The Company has in the past been, and continues to be, subject to product
liability claims. In addition, the Company has in the past and may in the
future recall or issue field corrections related to its products due to
manufacturing deficiencies, labeling errors or other safety or regulatory
reasons. There can be no assurance that the Company will not experience
material losses due to product liability claims or product recalls or
corrections.
o Sales of the Company's surgical and pharmaceutical products have been and
are expected to continue to be impacted by continuing pricing pressures
resulting from various government initiatives as well as from the
purchasing and operational decisions made by managed care organizations.
o A continuing political issue of debate in the United States is the
propriety of expanding Medicare coverage to include pharmaceutical
products. If measures to accomplish that coverage become law, and if these
measures impose price controls on the Company's products, the Company's
revenues and financial condition are likely to be materially and adversely
affected. Likewise, the United States Congress recently passed a law
permitting the reimportation of export pharmaceuticals in certain
circumstances. If this law results in substantial reimportation of
pharmaceuticals, the Company's United States sales of pharmaceuticals could
be materially and adversely affected.
o The Company collects and pays a substantial portion of its sales and
expenditures in currencies other than the U.S. dollar. Therefore,
fluctuations in foreign currency exchange rates affect the Company's
operating results. The Company can provide no assurance that future
exchange rate movements will not have a material adverse effect on the
Company's sales, gross profit or operating expenses.
o Patent protection is generally important in the pharmaceutical industry.
Therefore, Allergan's future financial success may depend in part on
obtaining patent protection for technologies incorporated into products. No
assurance can be given that patents will be issued covering any products,
or that any existing patents or patents issued in the future will be of
commercial benefit. In addition, it is impossible to anticipate the breadth
or degree of protection that any such patents will afford, and there can be
no assurance that any such patents will not be successfully challenged in
the future. If the Company is unsuccessful in obtaining or preserving
patent protection, or if any products rely on unpatented proprietary
technology, there can be no assurance that others will not commercialize
products substantially identical to such products. Furthermore, although
Allergan has a corporate policy not to infringe the valid and enforceable
patents of others, Allergan cannot provide assurances that its products
will not infringe patents held by third parties. In such event, licenses
from such third parties may not be available or may not be available on
commercially attractive terms.
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Allergan, Inc.
CERTAIN FACTORS AND TRENDS AFFECTING ALLERGAN AND ITS BUSINESSES (Continued)
o The Company's business is also subject to other risks generally associated
with doing business abroad, such as political unrest and changing economic
conditions with countries where the Company's products are sold or
manufactured. Management cannot provide assurances that it can successfully
manage these risks or avoid their effects.
o The Company sells its pharmaceutical products primarily through
wholesalers. Wholesaler purchases may exceed customer demand, resulting in
reduced wholesaler purchases in later quarters. The Company can give no
assurances that wholesaler purchases will not decline as a result of this
potential excess buying.
o Future performance of the Company will be affected by the introduction of
new products and FDA approval of new indications for current products such
as Botox(R) Purified Neurotoxin Complex. The Company has allocated
significant resources to the development and introduction of new products
and indications. The successful development, regulatory approval and market
acceptance of the products and indications cannot be assured.
o There are intrinsic uncertainties associated with research & development
efforts and the regulatory process both of which are discussed in greater
details in the "Research and Development" and the "Government Regulation"
sections of Allergan's Annual Report on Form 10-K for the year ending
December 31, 1999, which are incorporated herein by reference.
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Allergan, Inc.
PART II - OTHER INFORMATION
Item 5. Other Information.
ANNUAL MEETING.
The Company's next annual stockholders' meeting will be held on
Wednesday, April 25, 2001 at 10:00 A.M.
Item 6. Exhibits and Reports on Form 8-K
- Exhibits
(numbered in accordance with Item 601 of Regulation S-K)
27 Financial Data Schedule
- Reports on Form 8-K
None.
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SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Date: November 13, 2000 ALLERGAN, INC.
/s/ Eric K. Brandt
---------------------------------------
Eric K. Brandt
Principal Financial Officer
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EXHIBIT INDEX
Exhibit Number Description
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27 Financial Data Schedule