Abbott Laboratories (ABT), (founding name: Abbott Alkaloid Company) is a global pharmaceutical company with around 73,000 employees in 150 countries. Abbott was founded in 1888 by Wallace C. Abbott (1857-1921) and is headquartered in Abbott Park, a northern suburb of Chicago, Illinois.
FORM 10-Q SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 (Mark One) / X / QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended June 30, 1996 OR / / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from _________ to _________ Commission File No. 1-2189 ABBOTT LABORATORIES An Illinois Corporation I.R.S. Employer Identification No. 36-0698440 100 Abbott Park Road Abbott Park, Illinois 60064-3500 Telephone: (847) 937-6100 Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X . No . ----- ----- As of July 31, 1996, the Corporation had 780,545,080 common shares without par value outstanding.
PART 1 FINANCIAL INFORMATION ------------------------------- ABBOTT LABORATORIES AND SUBSIDIARIES --------------------------------------- CONDENSED CONSOLIDATED FINANCIAL STATEMENTS ---------------------------------------------- (UNAUDITED) -----------
ABBOTT LABORATORIES AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENT OF EARNINGS (UNAUDITED) (Dollars in thousands except per share data) <TABLE> <CAPTION> THREE MONTHS ENDED SIX MONTHS ENDED JUNE 30 JUNE 30 ------------------------- ------------------------- 1996 1995 1996 1995 ---------- ---------- ---------- ---------- <S> <C> <C> <C> <C> Net sales............................. $2,699,240 $2,500,310 $5,371,417 $5,024,707 ---------- ---------- ---------- ---------- Cost of products sold................. 1,143,947 1,086,023 2,300,164 2,174,934 Research and development.............. 304,846 287,360 573,462 534,535 Selling, general and administrative... 598,866 532,277 1,171,212 1,131,109 ---------- ---------- ---------- ---------- Total Operating Cost and Expenses... 2,047,659 1,905,660 4,044,838 3,840,578 ---------- ---------- ---------- ---------- Operating Earnings.................... 651,581 594,650 1,326,579 1,184,129 ---------- ---------- ---------- ---------- Interest expense...................... 22,228 17,852 39,835 31,804 Interest income....................... (10,186) (13,202) (20,676) (24,212) Other (income) expense, net........... (27,728) (11,461) (40,852) (16,774) ---------- ---------- ---------- ---------- Earnings Before Taxes................. 667,267 601,461 1,348,272 1,193,311 Taxes on Earnings..................... 196,844 177,431 397,740 352,027 ---------- ---------- ---------- ---------- Net Earnings.......................... $ 470,423 $ 424,030 $ 950,532 $ 841,284 ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- Net Earnings Per Common Share......... $.60 $.53 $1.21 $1.05 ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- Cash Dividends Declared Per Common Share.................... $.24 $.21 $.48 $.42 ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- </TABLE> The accompanying notes to condensed consolidated financial statements are an integral part of this statement. 2
ABBOTT LABORATORIES AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEET (Dollars in Thousands) <TABLE> <CAPTION> JUNE 30 DECEMBER 31 ----------- ----------- 1996 1995 ----------- ----------- (UNAUDITED) <S> <C> <C> ASSETS Current Assets: Cash and cash equivalents................................................... $ 111,482 $ 281,197 Investment securities....................................................... 66,189 34,500 Trade Receivables, less allowances of $147,550 in 1996 and $157,990 in 1995...................................................... 1,643,909 1,563,038 Inventories: Finished products......................................................... 617,820 560,637 Work in process........................................................... 269,727 238,943 Materials................................................................. 307,695 311,361 ----------- ----------- Total inventories...................................................... 1,195,242 1,110,941 Prepaid income taxes........................................................ 647,876 651,436 Other prepaid expenses and receivables...................................... 661,707 585,599 ----------- ----------- Total Current Assets................................................... 4,326,405 4,226,711 ----------- ----------- Investment Securities Maturing after One Year................................... 468,219 422,547 ----------- ----------- Property and Equipment, at Cost................................................. 8,044,533 7,762,442 Less: accumulated depreciation and amortization............................. 3,709,198 3,512,904 ----------- ----------- Net Property and Equipment............................................. 4,335,335 4,249,538 Deferred Charges, Goodwill and Other Assets..................................... 1,423,915 513,784 ----------- ----------- $10,553,874 $ 9,412,580 ----------- ----------- ----------- ----------- LIABILITIES AND SHAREHOLDERS' INVESTMENT Current Liabilities: Short-term borrowings and current portion of long-term debt.................. $ 1,670,537 $ 1,049,863 Trade accounts payable....................................................... 806,290 755,921 Salaries, income taxes, dividends payable, and other accruals................ 2,049,997 1,984,530 ----------- ----------- Total Current Liabilities............................................... 4,526,824 3,790,314 ----------- ----------- Long-Term Debt................................................................... 433,437 435,198 ----------- ----------- Other Liabilities and Deferrals: Deferred Income Taxes........................................................ 176,557 67,993 Other ....................................................................... 776,560 722,228 ----------- ----------- Total Other Liabilities and Deferrals .................................. 953,117 790,221 ----------- ----------- Shareholders' Investment: Preferred shares, $1 par value Authorized - 1,000,000 shares, none issued - - Common shares, without par value Authorized - 1,200,000,000 shares Issued at stated capital amount - 1996: 791,001,929 shares; 1995: 797,021,211 shares...................... 628,216 581,562 Earnings employed in the business................................................ 4,158,481 3,926,917 Cumulative Translation Adjustments............................................... (89,379) (55,646) ----------- ----------- 4,697,318 4,452,833 Less: Common shares held in treasury, at cost - 1996: 9,661,672 shares; 1995: 9,714,379 shares............................... 50,990 51,268 Unearned compensation - restricted stock awards.................................. 5,832 4,718 ----------- ----------- Total Shareholders' Investment.......................................... 4,640,496 4,396,847 ----------- ----------- $10,553,874 $ 9,412,580 ----------- ----------- ----------- ----------- </TABLE> The accompanying notes to condensed consolidated financial statements are an integral part of this statement. 3
ABBOTT LABORATORIES AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS (UNAUDITED) (Dollars in thousands) <TABLE> <CAPTION> SIX MONTHS ENDED JUNE 30 ------------------------ 1996 1995 --------- --------- <S> <C> <C> Cash Flow From (Used in) Operating Activities: Net earnings....................................... $ 950,532 $ 841,284 Adjustments to reconcile net earnings to Net cash from operating activities - Depreciation and amortization...................... 319,262 260,286 Trade receivables.................................. (88,477) 3,604 Inventories........................................ (83,521) (8,656) Other, net......................................... 81,214 (61,303) --------- --------- Net Cash From Operating Activities............ 1,179,010 1,035,215 --------- --------- Cash Flow From (Used in) Investing Activities: Acquisitions of property and equipment............. (460,908) (485,627) Acquisition of MediSense, net of cash acquired..... (806,738) - Investment securities transactions................. (50,757) (104,105) Other.............................................. 13,787 11,092 --------- --------- Net Cash (Used in) Investing Activities....... (1,304,616) (578,640) --------- --------- Cash Flow From (Used in) Financing Activities: Borrowing transactions............................. 620,517 184,038 Common share transactions.......................... (305,876) (355,741) Dividends paid..................................... (353,899) (320,432) --------- --------- Net Cash (Used in) Financing Activities....... (39,258) (492,135) --------- --------- Effect of exchange rate changes on cash and cash equivalents................................... (4,851) (317) --------- --------- Net (Decrease) in Cash and Cash Equivalents............ (169,715) (35,877) Cash and Cash Equivalents, Beginning of Year........... 281,197 290,272 --------- --------- Cash and Cash Equivalents, End of Period............... $ 111,482 $ 254,395 --------- --------- --------- --------- </TABLE> The accompanying notes to condensed consolidated financial statements are an integral part of this statement. 4
ABBOTT LABORATORIES AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 1996 (UNAUDITED) NOTE 1 - BASIS OF PREPARATION: The accompanying unaudited, condensed consolidated financial statements have been prepared pursuant to rules and regulations of the Securities and Exchange Commission and, therefore, do not include all information and footnote disclosures normally included in audited financial statements. However, in the opinion of management, all adjustments (which include only normal adjustments) necessary to present fairly the financial position, cash flows, and results of operations have been made. It is suggested that these statements be read in conjunction with the financial statements included in the Company's Annual Report on Form 10-K for the year ended December 31, 1995. NOTE 2 - EARNINGS PER COMMON SHARE: Earnings per common share amounts are computed by using the weighted average number of common shares outstanding. These shares averaged 784,547,000 for the six months ended June 30, 1996 and 799,246,000 for the same period in 1995. NOTE 3 - TAXES ON EARNINGS: Taxes on earnings reflect the estimated annual effective tax rates. The effective tax rates are less than the statutory U.S. Federal Income tax rate principally due to tax incentive grants related to subsidiaries operating in Puerto Rico, the Dominican Republic, Italy, Ireland, and the Netherlands. 5
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 1996 (UNAUDITED), CONTINUED NOTE 4 - LITIGATION AND ENVIRONMENTAL MATTERS: The Company is involved in various claims and legal proceedings including numerous antitrust suits and investigations in connection with the sale and marketing of infant formula products and the pricing of prescription pharmaceuticals. In addition, the Company has been identified as a potentially responsible party for investigation and cleanup costs at a number of locations in the United States and Puerto Rico under Federal remediation laws and is voluntarily investigating potential contamination at a number of Company-owned locations. The matters above are discussed more fully in Item 1, Business - Environmental Matters, and Item 3, Legal Proceedings, in the Annual Report on Form 10-K, which is available upon request, and in Part II, Item 1, Legal Proceedings, in this Form. The Company expects that within the next year, progress in the legal proceedings described above may cause a change in the estimated reserves recorded by the Company. While it is not feasible to predict the outcome of such pending claims, proceedings, investigations and remediation activities with certainty, management is of the opinion that their ultimate disposition should not have a material adverse effect on the Company's financial position, cash flows, or results of operations. NOTE 5 - ACQUISITION OF MEDISENSE: In May 1996, the Company acquired, for cash, substantially all of the outstanding shares of MediSense, Inc. (MediSense), a manufacturer of blood glucose self-testing products. The Company is finalizing the appraisal to determine the purchase price allocation. However, a substantial portion of the purchase price is expected to be allocated to intangible assets, including goodwill, which will be amortized on a straight-line basis over up to 40 years. In addition, $35.2 million was charged against earnings for in-process research and development. Had this acquisition occurred on January 1, 1995, consolidated sales and net income would not have been significantly different from reported amounts. 6
FINANCIAL REVIEW RESULTS OF OPERATIONS - SECOND QUARTER AND FIRST SIX MONTHS 1996 COMPARED WITH SAME PERIODS IN 1995 Worldwide sales for the second quarter and first six months increased 8.0 percent and 6.9 percent, respectively, over the comparable 1995 periods. Net earnings increased 10.9 percent and 13.0 percent, respectively, in the second quarter and first six months 1996. Earnings per share increased 13.2 percent and 15.2 percent, respectively, over the prior year periods. Gross profit margin (sales less cost of products sold, including freight and distribution expenses) was 57.6 percent for the 1996 second quarter, compared to 56.6 percent for the 1995 second quarter. First half gross margin was 57.2 percent, compared to 56.7 percent a year earlier. These increases are due primarily to favorable product mix, especially higher sales of pharmaceuticals, and productivity improvements; partially offset by higher project expenses for new products and the effects of inflation. Research and development expenses were $304.8 million and $573.5 million for the second quarter and first six months 1996, respectively, including $35.2 million of acquired research and development related to the purchase of MediSense. The second quarter and six month 1995 results included a similar charge for the acquisition of certain technologies. Research and development represented 11.3 percent and 10.7 percent of net sales, compared to 11.5 percent and 10.6 percent in 1995. The majority of research and development expenditures continues to be concentrated on pharmaceutical and diagnostic products. Selling, general and administrative expenses for the second quarter and first six months 1996 increased 12.5 percent and 3.5 percent, respectively, over the comparable prior year periods, net of the favorable effect of the relatively stronger U.S. dollar of 2.4 percent and 1.1 percent, respectively. The net increases reflect additional selling and marketing support for new and existing products, primarily for pharmaceutical and nutritional products, partially offset for the six months 1996 by lower litigation expenses and because no contributions were made to the Company's charitable foundation in 1996. Other (income) expense, net, includes net foreign exchange losses of $3.8 million and $13.2 million, respectively, for the second quarter and first six months 1996 compared with net foreign exchange losses of $7.1 million and $15.5 million for the corresponding prior year periods. 7
FINANCIAL REVIEW (Continued) INDUSTRY SEGMENTS Industry segment sales for the second quarter and first six months 1996 and the related change from the comparable 1995 periods are shown in the table below. The Pharmaceutical and Nutritional Products segment includes a broad line of adult and pediatric pharmaceuticals and nutritionals, which are sold primarily on the prescription or recommendation of physicians or other health care professionals; consumer products; agricultural and chemical products; and bulk pharmaceuticals. The Hospital and Laboratory Products segment includes diagnostic systems for blood banks, hospitals, commercial laboratories and alternate-care testing sites, and consumers; intravenous and irrigation fluids and related administration equipment; drugs and drug delivery systems; anesthetics; critical care products; and other medical specialty products for hospitals and alternate-care sites. Domestic and international sales for the second quarter and first six months 1996 primarily reflect unit growth. International sales were unfavorably affected 5.3 percent by the relatively stronger dollar in the second quarter. On a year-to-date basis, international sales were unfavorably affected 2.8 percent by the relatively stronger U.S. dollar. Second Quarter Six Months - ------------------------------------------------------------------------------- SEGMENT SALES 1996 Percent 1996 Percent (In millions of dollars) Sales Increase Sales Increase - ------------------------------------------------------------------------------- Pharmaceutical and Nutritional Products: Domestic $ 995.3 11.2 $2,035.8 8.6 - ------------------------------------------------------------------------------- International 535.7 7.6 1,094.9 10.2 - ------------------------------------------------------------------------------- 1,531.0 9.9 3,130.7 9.1 Hospital and Laboratory Products: Domestic 620.1 5.2 1,195.2 2.7 - ------------------------------------------------------------------------------- International 548.1 5.9 1,045.5 5.4 - ------------------------------------------------------------------------------- 1,168.2 5.5 2,240.7 3.9 Total All Segments: Domestic 1,615.4 8.8 3,231.0 6.3 - ------------------------------------------------------------------------------- International 1,083.8 6.7 2,140.4 7.8 - ------------------------------------------------------------------------------- $2,699.2 8.0 $5,371.4 6.9 - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- 8
FINANCIAL REVIEW (Continued) LIQUIDITY AND CAPITAL RESOURCES AT JUNE 30, 1996 COMPARED WITH DECEMBER 31, 1995 Net cash from operating activities for the first six months 1996 totaled $1.179 billion. The Company expects annual cash flow from operating activities to continue to approximate or exceed the company's capital expenditures and cash dividends. The Company funded the acquisition of MediSense through commercial paper borrowings. The Company has maintained its favorable bond ratings (AAA by Standard & Poor's Corporation and Aa1 by Moody's Investors Service) and continues to have readily available financial resources, including unused domestic lines of credit of $1.5 billion at June 30, 1996. These lines of credit back up domestic commercial paper borrowing arrangements. During the first six months 1996, the Company continued its program to purchase its common shares. The Company purchased and retired 8,415,000 shares during this period at a cost of $351 million. As of June 30, 1996, an additional 4,955,000 shares may be purchased in future periods under authorization granted by the Board of Directors in September 1995. In June 1996, the Company filed a registration statement with the Securities and Exchange Commission. The Company may issue up to $650 million of debt securities in the future under this registration statement. LEGISLATIVE ISSUES The Company's primary markets are highly competitive and subject to substantial government regulation. The Company expects debate to continue at both the federal and the state levels over the availability, method of delivery, and payment for health care products and services. The Company believes that if legislation is enacted, it could have the effect of reducing prices, or reducing the rate of price increases for medical products and services. International operations are also subject to a significant degree of government regulation. It is not possible to predict the extent to which the Company or the health care industry in general might be adversely affected by these factors in the future. A more complete discussion of these factors is contained in Item 1, Business, in the Annual Report on Form 10-K, which is available upon request. 9
PART II. OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS The Company's 10-Q for the fiscal quarter ended March 31, 1996 described 23 antitrust suits, one shareholder derivative suit, and 5 investigations that had been brought in connection with the Company's marketing and sale of infant formula products. It also reported that the Company had entered into an agreement to settle 20 of these 23 antitrust suits; that one of the 20 cases covered by the agreement had been finally settled; and that the settlement of each of the remaining 19 cases would only become final when it had been approved by the court in the state where it was pending. On June 7, 1996 the court in Wisconsin gave its final approval to the settlement of the two cases that were pending in that state. The settlements of the 17 remaining cases have not yet been finalized. On June 11, 1996 the Illinois Court of Appeals (First District) dismissed plaintiff's appeal of the previous dismissal of the one shareholder derivative suit that had been pending before it. As of June 30, 1996, a total of 20 antitrust suits and 5 investigations are pending in connection with the Company's marketing and sale of infant formula products. The Company's 10-Q for the fiscal quarter ending March 31, 1996 reported that the Company had entered into a settlement agreement for the class action portion of litigation that is pending in federal court in Chicago, Illinois and is known as IN RE: BRAND NAME PRESCRIPTION DRUG ANTITRUST LITIGATION, MDL 997; that the settlement agreement had to be approved by the federal court before it became final and effective; that on April 4, 1996, the federal court disapproved the settlement agreement; and that the Company had filed a request for permission to seek an interlocutory appeal of the denial of the settlement agreement to the Federal Court of Appeals for the Seventh Circuit. On May 16, 1996 the court denied this request. As of June 30, 1996, 139 cases and one Federal Trade Commission investigation are pending in connection with the Company's pricing of brand name prescription pharmaceuticals. The Company's 10-Q for the fiscal quarter ending March 31, 1996 reported that on March 15, 1996, the North Carolina Department of Environment, Health, and Natural Resources ("DEHNR") issued a Notice of Initiation of Enforcement Action to the Company alleging that during the period between 1987 and 1993 the Company violated certain air quality regulations in North Carolina. On July 1, 1996 the Company received a civil penalty assessment from the DEHNR for $968,763.58 in connection with this enforcement action. The Company is contesting the assessment.
While it is not feasible to predict the outcome of such pending claims, proceedings, and investigations with certainty, management is of the opinion that their ultimate disposition should not have a material adverse effect on the Company's financial position, cash flows, or results of operations. Item 6. Exhibits and Reports on Form 8-K (a) Exhibits 10.1 Abbott Laboratories 1996 Incentive Stock Program* - attached hereto. 10.2 Amended Abbott Laboratories Supplemental Pension Plan* - attached hereto. 11. Statement re: computation of per share earnings - attached hereto. 12. Statement re: computation of ratio of earnings to fixed charges - attached hereto. 27. Financial Data Schedule - attached hereto. (b) Reports on Form 8-K No reports on Form 8-K were filed during the quarter ended June 30, 1996. * denotes a management contract or compensatory plan or arrangement required to be filed as an exhibit hereto. SIGNATURE Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. ABBOTT LABORATORIES Dated: August 13, 1996 /s/ Theodore A. Olson ---------------------------------- Theodore A. Olson, Vice President and Controller (Principal Accounting Officer)