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 March 31, 1998 OR / / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from __________________ to ____________________ Commission File No. 1-2189 ABBOTT LABORATORIES An Illinois Corporation I.R.S. Employer Identification No. 36-0698440 100 Abbott Park Road Abbott Park, Illinois 60064-3500 Telephone: (847) 937-6l00 Indicate by check mark whether the registrant (l) has filed all reports required to be filed by Section l3 or l5(d) of the Securities Exchange Act of l934 during the preceding l2 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X . No . ___ ____ As of April 30, 1998, the Corporation had 771,789,413 common shares without par value outstanding.
PART 1 FINANCIAL INFORMATION ABBOTT LABORATORIES AND SUBSIDIARIES CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
ABBOTT LABORATORIES AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENT OF EARNINGS (UNAUDITED) (DOLLARS AND SHARES IN THOUSANDS EXCEPT PER SHARE DATA) <TABLE> <CAPTION> THREE MONTHS ENDED MARCH 31 --------------------------- 1998 1997 ---------- ---------- <S> <C> <C> Net Sales..................................... $3,044,913 $2,999,814 --------- --------- Cost of products sold......................... 1,279,973 1,327,331 Research and development...................... 279,876 280,074 Selling, general and administrative........... 682,175 656,596 --------- --------- Total Operating Cost and Expenses........... 2,242,024 2,264,001 --------- --------- Operating Earnings............................ 802,889 735,813 --------- --------- Interest expense.............................. 37,960 32,754 Interest income............................... (12,914) (11,723) Other (income) expense, net................... (41,036) (43,836) --------- --------- Earnings Before Taxes......................... 818,879 758,618 Taxes on Earnings............................. 229,286 223,792 --------- --------- Net Earnings.................................. $ 589,593 $ 534,826 --------- --------- --------- --------- Basic Earnings Per Common Share............... $.77 $.69 --------- --------- --------- --------- Diluted Earnings Per Common Share............. $.76 $.68 --------- --------- --------- --------- Cash Dividends Declared Per Common Share............................ $.30 $.27 --------- --------- --------- --------- Average Number of Common Shares Outstanding Used for Basic Earnings Per Common Share... 764,004 773,983 Dilutive Common Stock Options................. 10,541 10,640 --------- --------- Average Number of Common Shares Outstanding Plus Dilutive Common Stock Options.......... 774,545 784,623 --------- --------- --------- --------- Outstanding Employee Common Stock Options Having No Dilutive Effect.................. 6,734 5,937 --------- --------- --------- --------- </TABLE> The accompanying notes to condensed consolidated financial statements are an integral part of this statement.
ABBOTT LABORATORIES AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEET (DOLLARS IN THOUSANDS) <TABLE> <CAPTION> MARCH 31 DECEMBER 31 1998 1997 ----------- ----------- (UNAUDITED) <S> <C> <C> ASSETS Current Assets: Cash and cash equivalents........................ $ 225,544 $ 230,024 Investment securities............................ 69,401 28,986 Trade Receivables, less allowances of $183,677 in 1998 and $167,406 in 1997......... 1,701,232 1,782,326 Inventories: Finished products.............................. 698,925 667,355 Work in process................................ 320,245 287,653 Materials...................................... 325,021 324,892 ----------- ----------- Total Inventories........................... 1,344,191 1,279,900 Prepaid expenses, income taxes, and other receivables............................. 1,841,436 1,716,972 ----------- ----------- Total Current Assets........................ 5,181,804 5,038,208 ----------- ----------- Investment Securities Maturing after One Year..... 573,701 630,967 ----------- ----------- Property and Equipment, at Cost................... 8,899,831 8,790,157 Less: accumulated depreciation and amortization... 4,313,956 4,220,466 ----------- ----------- Net Property and Equipment...................... 4,585,875 4,569,691 Deferred Charges, Intangible and Other Assets..... 1,773,722 1,822,202 ----------- ----------- $12,115,102 $12,061,068 ----------- ----------- ----------- ----------- LIABILITIES AND SHAREHOLDERS' INVESTMENT Current Liabilities: Short-term borrowings and current portion of long-term debt................................ $ 1,290,488 $ 1,781,352 Trade accounts payable........................... 942,589 1,001,058 Salaries, income taxes, dividends payable, and other accruals................................. 2,493,498 2,252,058 ----------- ----------- Total Current Liabilities................... 4,726,575 5,034,468 ----------- ----------- Long-Term Debt.................................... 1,139,720 937,983 ----------- ----------- Other Liabilities and Deferrals................... 1,107,095 1,089,940 ----------- ----------- Shareholders' Investment: Preferred shares, $1 par value Authorized - 1,000,000 shares, none issued..... ... ... Common shares, without par value Authorized - 1,200,000,000 shares Issued at stated capital amount - Shares: 1998: 772,226,694; 1997: 773,234,252.................... 997,593 907,106 Earnings employed in the business................. 4,507,409 4,395,582 Accumulated other comprehensive income............ (276,042) (230,241) ----------- ----------- 5,228,960 5,072,447 Less: Common shares held in treasury, at cost -
Shares: 1998: 8,871,199; 1997: 9,140,199......... 46,818 48,238 Unearned compensation - restricted stock awards... 40,430 25,532 ----------- ----------- Total Shareholders' Investment.............. 5,141,712 4,998,677 ----------- ----------- $12,115,102 $12,061,068 ----------- ----------- ----------- ----------- </TABLE> The accompanying notes to condensed consolidated financial statements are an integral part of this statement.
ABBOTT LABORATORIES AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS (UNAUDITED) (DOLLARS IN THOUSANDS) <TABLE> <CAPTION> THREE MONTHS ENDED MARCH 31 --------------------------- 1998 1997 ---- ---- <S> <C> <C> Cash Flow From (Used in) Operating Activities: Net earnings....................................... $ 589,593 $ 534,826 Adjustments to reconcile net earnings to net cash from operating activities - Depreciation and amortization...................... 190,585 176,076 Trade Receivables.................................. 50,467 (93,688) Inventories........................................ (86,212) 4,445 Other, Net......................................... 136,950 162,967 ----------- --------- Net Cash From Operating Activities............ 881,383 784,626 ----------- --------- Cash Flow From (Used in) Investing Activities: Acquisitions of property, equipment and businesses (238,447) (220,069) Investment Securities Transactions................. 16,778 15,394 Other.............................................. 4,388 5,857 ----------- --------- Net Cash (Used in) Investing Activities....... (217,281) (198,818) ----------- --------- Cash Flow From (Used in) Financing Activities: Borrowing transactions............................. (286,763) (175,842) Common share transactions.......................... (171,709) (189,608) Dividends paid..................................... (206,343) (185,905) ----------- --------- Net Cash (Used in) Financing Activities....... (664,815) (551,355) ----------- --------- Effect of exchange rate changes on cash and cash equivalents................................... ( 3,767) (10,569) ----------- --------- Net Increase (Decrease) in Cash and Cash Equivalents... (4,480) 23,884 Cash and Cash Equivalents, Beginning of Year........... 230,024 110,209 ----------- --------- Cash and Cash Equivalents, End of Period............... $ 225,544 $ 134,093 ----------- --------- ----------- --------- </TABLE> The accompanying notes to condensed consolidated financial statements are an integral part of this statement.
ABBOTT LABORATORIES AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS MARCH 31, 1998 (UNAUDITED) NOTE 1 - BASIS OF PREPARATION: The accompanying unaudited, condensed consolidated financial statements have been prepared pursuant to rules and regulations of the Securities and Exchange Commission and, therefore, do not include all information and footnote disclosures normally included in audited financial statements. However, in the opinion of management, all adjustments (which include only normal adjustments) necessary to present fairly the financial position, cash flows, and results of operations have been made. It is suggested that these statements be read in conjunction with the financial statements included in the Company's Annual Report on Form 10-K for the year ended December 31, 1997. NOTE 2 - TAXES ON EARNINGS: Taxes on earnings reflect the estimated annual effective tax rates. The effective tax rates are less than the statutory U. S. Federal income tax rate principally due to tax incentive grants related to subsidiaries operating in Puerto Rico, the Dominican Republic, Italy, Ireland, and the Netherlands. NOTE 3 - LITIGATION AND ENVIRONMENTAL MATTERS: The Company is involved in various claims and legal proceedings including numerous antitrust suits and investigations in connection with the pricing of prescription pharmaceuticals. In addition, the Company has been identified as a potentially responsible party for investigation and cleanup costs at a number of locations in the United States and Puerto Rico under Federal and state remediation laws and is investigating potential contamination at a number of Company-owned locations. The matters above are discussed more fully in Note 10 to the financial statements included in the Company's Annual Report on Form 10-K, which is available upon request. The Company expects that within the next year, progress in the legal proceedings described above may cause a change in the estimated reserves recorded by the Company. While it is not feasible to predict the outcome of such pending claims, proceedings and investigations with certainty, management is of the opinion that their ultimate disposition should not have a material adverse effect on the Company's financial position, cash flows, or results of operations.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS MARCH 31, 1998 (UNAUDITED), CONTINUED NOTE 4 - ACQUISITIONS: On April 17, 1998, the Company acquired International Murex Technologies Corporation for approximately $234 million in cash. Had this acquisition taken place on January 1, 1997, consolidated sales and net income would not have been significantly different from reported amounts. NOTE 5 - COMPREHENSIVE INCOME: <TABLE> <CAPTION> THREE MONTHS ENDED MARCH 31 --------------------------- 1998 1997 ---------- --------- <S> <C> <C> Net Earnings $ 589,593 $ 534,826 ---------- --------- Other comprehensive income: Foreign currency translation adjustments (45,595) (99,579) Unrealized losses on marketable equity securities (343) (4,704) Tax benefit related to items of other comprehensive income 137 1,882 ---------- --------- Other comprehensive income, net of tax (45,801) (102,401) ---------- --------- Comprehensive Income 543,792 432,425 ---------- --------- ---------- --------- </TABLE> As of March 31, 1998, the cumulative balances for foreign currency translation adjustments and the unrealized (gain) on marketable equity securities were $308 million and ($32) million, respectively.
NOTE 6 - ADOPTION OF STATEMENT OF POSITION In the first quarter, 1998, the Company elected early adoption of the provisions of the American Institution of Certified Public Accountants' Statement of Position 98-1, "Accounting for the Costs of Computer Software Developed or Obtained for Internal Use." Adoption of the provisions of this statement will not have a material effect on the financial statements of the Company. NOTE 7 - STOCK SPLIT: On February 13, 1998, the Company announced a two-for-one stock split. Shareholders of record at the close of business on May 1, 1998 will be issued an additional share of the Company's common stock on May 29, 1998 for each share owned on the record date. The number of shares and the per share amounts included in the March 31, 1998 and December 31, 1997 condensed consolidated financial statements have not been restated for the stock split. FINANCIAL REVIEW RESULTS OF OPERATIONS - FIRST QUARTER 1998 COMPARED WITH FIRST QUARTER 1997 Worldwide sales for the first quarter increased 1.5 percent to $3.045 billion from $3.000 billion in 1997. Excluding the negative effect of the relatively stronger U.S. dollar, sales increased 5.1 percent in the first quarter 1998 compared to 1997. Net earnings increased 10.2 percent over the prior year quarter. Basic earnings per common share and diluted earnings per common share increased 11.6 percent and 11.8 percent, respectively, over the prior year. Gross profit margin (sales less cost of products sold, including freight and distribution expenses) of 58.0 percent for the first quarter was up from 55.8 percent one year ago. This increase was primarily due to productivity improvements and cost savings, partially offset by unfavorable product mix, primarily slower sales of pharmaceuticals. Research and development expenses were $279.9 million in the first quarter 1998. This represented 9.2 percent of net sales, compared to 9.3 percent in 1997. The majority of research and development expenditures continues to be concentrated on pharmaceutical and diagnostic products. Selling, general, and administrative expenses for the first quarter increased 3.9 percent from the prior year, net of the favorable effect of the relatively stronger U.S. dollar of 3.9%. This net increase reflects inflation and additional selling and marketing support for new and existing products, primarily for pharmaceutical and nutritional products. Other (income) expense, net, includes net foreign exchange losses of $7.4 million in the 1998 first quarter, compared with net foreign exchange gains of $10.9 million in the same quarter last year.
FINANCIAL REVIEW (CONTINUED) INDUSTRY SEGMENTS Industry segment sales for the first quarter 1998 and the related change from the comparable 1997 period are shown in the table below. The Pharmaceutical and Nutritional Products segment includes a broad line of adult and pediatric pharmaceuticals and nutritionals, which are sold primarily on the prescription or recommendation of physicians or other health care professionals; consumer products; agricultural and chemical products; and bulk pharmaceuticals. The Hospital and Laboratory Products segment includes diagnostic systems for consumers, blood banks, hospitals, commercial laboratories and alternate-care testing sites; intravenous and irrigation fluids and related administration equipment; drugs and drug delivery systems; anesthetics; critical care products; and other medical specialty products for hospitals and alternate-care sites. Domestic and international sales for the first quarter primarily reflect unit growth. Total sales were unfavorably affected 3.6 percent and international sales were unfavorably affected 9.5 percent by the relatively stronger U. S. dollar in the first quarter. <TABLE> <CAPTION> FIRST QUARTER ------------- SEGMENT SALES 1998 PERCENT (in millions of dollars) SALES INCREASE - ---------------------------------------------------------------------------- <S> <C> <C> Pharmaceutical and Nutritional Products: Domestic $1,200.1 0.1 - ---------------------------------------------------------------------------- International 606.9 (3.2) - ---------------------------------------------------------------------------- 1,807.0 (1.1) Hospital and Laboratory Products: Domestic 736.4 13.0 - ---------------------------------------------------------------------------- International 501.5 (3.9) - ---------------------------------------------------------------------------- 1,237.9 5.5 Total All Segments: Domestic 1,936.5 4.6 - ---------------------------------------------------------------------------- International 1,108.4 (3.5) - ---------------------------------------------------------------------------- $3,044.9 1.5 - ---------------------------------------------------------------------------- - ---------------------------------------------------------------------------- </TABLE>
FINANCIAL REVIEW (CONTINUED) LIQUIDITY AND CAPITAL RESOURCES AT MARCH 31, 1998 COMPARED WITH DECEMBER 31, 1997 Net cash from operating activities for the first quarter 1998 totaled $881 million. The Company expects annual cash flow from operating activities to continue to approximate or exceed the Company's capital expenditures and cash dividends. The Company funded the acquisition of Murex through commercial paper borrowings. The Company has maintained its favorable bond ratings (AAA by Standard & Poor's Corporation and Aa1 by Moody's Investors Service) and continues to have readily available financial resources, including unused domestic lines of credit of $1.5 billion at March 31, 1998. These lines of credit support domestic commercial paper borrowing arrangements. In the first quarter 1998, the Company issued $200 million of debt securities under a registration statement filed with the Securities and Exchange Commission in June 1996. The Company may issue up to an additional $200 million under this registration statement. During the first quarter 1998, the Company continued its program to purchase its common shares. The Company purchased and retired 2,688,000 shares during this period at a cost of $199 million. As of March 31, 1998, an additional 11,012,000 shares may be purchased in future periods under authorization granted by the Board of Directors in December 1997. LEGISLATIVE ISSUES The Company's primary markets are highly competitive and subject to substantial government regulation. The Company expects debate to continue at both the federal and the state levels over the availability, method of delivery, and payment for health care products and services. The Company believes that if legislation is enacted, it could have the effect of reducing prices, or reducing the rate of price increases for medical products and services. International operations are also subject to a significant degree of government regulation. It is not possible to predict the extent to which the Company or the health care industry in general might be adversely affected by these factors in the future. A more complete discussion of these factors is contained in Item 1, Business, in the Annual Report on Form 10-K, which is available upon request.
PART II. OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS The Company's 10-K for the fiscal year ended December 31, 1997 described two antitrust suits and five investigations (as of January 31, 1998) in connection with the Company's sale and marketing of infant formula products. During the first quarter of 1998, the court denied the Company's motion to dismiss the case pending in state court in St. Louis, Missouri. As reported in the Company's 10-K for the fiscal year ended December 31, 1997, the Company is involved in numerous antitrust suits and two investigations regarding the Company's pricing of pharmaceutical products. As of March 31, 1998, 120 federal cases are pending in the United States District Court for the Northern District of Illinois as In re: Brand Name Prescription Drug Antitrust Litigation, MDL 997. Four cases previously pending in federal court were remanded to state court. Numerous appeals have arisen out of the case pending in the MDL 997 litigation which has been certified as a class action on behalf of certain retail pharmacies. The petition of the Company (along with other defendants) for certiorari to the United States Supreme Court seeking a reversal of the Court of Appeals' rulings on certain issues was denied on March 23, 1998. The federal retail pharmacy class action trial is scheduled to begin in September 1998. As of March 31, 1998, there were 25 cases pending in state court and one case pending in a District of Columbia court. As noted above, the following four cases were remanded to state court by the federal court in the MDL 997 litigations: Clark County, Alabama, Dade County, Florida, Johnson County, Kansas, and Davidson County, Tennessee. The Company has entered into settlement agreements to settle the retail pharmacy lawsuits in Washington County, Wisconsin and one of the suits in Hennepin County, Minnesota. The settlement agreement in the Minnesota lawsuit was approved on December 30, 1997. The settlement agreement in the Wisconsin lawsuit was approved on February 16, 1998. Under the settlement agreements, the Company did not admit liability but did pay $42,767.32 in connection with the Minnesota lawsuit and $147,877.78 in connection with the Wisconsin lawsuit. Motions for certification as a consumer class action were denied in Maine, Michigan, and Minnesota. Appeals of the consumer class certification decisions are pending in Maine and Michigan. Trial in the individual consumer case pending in Michigan is scheduled for July 1998. The Company's 10-K for the fiscal year ended December 31, 1997 described five cases (as of January 31, 1998) involving the Company's patents for terazosin hydrochloride, a drug the Company sells under the trademark Hytrin-Registered Trademark-. On March 31, 1998, the Company and Zenith reached an agreement that resolved the litigation between the parties. In the settlement, Zenith acknowledged the validity of Abbott's terazosin hydrochloride patents and agreed to refrain from selling a generic version of terazosin hydrochloride until the expiration of one of Abbott's patents for terazosin hydrochloride (patent No. 4,251,532). On April 1, 1998, the Company and Geneva reached an agreement under which Geneva will not market its Food and Drug Administration approved generic terazosin hydrochloride capsules until resolution of the pending litigation between the parties. The Company agreed to make quarterly payments to Zenith and Geneva until the date on which they may enter the market for terazosin hydrochloride under their agreements. Both Zenith and Geneva would be free to enter the market for terazosin hydrochloride in the United States if certain of the Company's patents for terazosin hydrochloride were determined to be invalid or if another company legally enters the generic market in the United States. On April 6, 1998, the Company sued Warner Chilcott, Inc. ("Warner") alleging infringement of one of the Company's patents for terazosin hydrochloride. Warner filed counterclaims alleging, among other things that the Company's agreements with Zenith and Geneva and its course of conduct with respect to terazosin hydrochloride violate the Antitrust laws. Warner seeks unspecified damages. While it is not feasible to predict the outcome of such pending claims, proceedings, and investigations with certainty, management is of the opinion that their ultimate disposition should not have a material adverse effect on the Company's financial position, cash flows, or results of operations. Item 4. Submission of Matters to a Vote of Security Holders The Company held its Annual Meeting of Shareholders on April 24, 1998. The following is a summary of the matters voted on at that meeting. (a) The shareholders elected the Company's entire Board of Directors. The persons elected to the Company's Board of Directors and the number of shares cast for and the number of shares withheld, with respect to each of these persons, were as follows: <TABLE> <CAPTION> Name Votes For Votes Withheld <S> <C> <C> K. Frank Austen, M.D. 644,878,769 8,534,278 Duane L. Burnham 649,189,909 4,223,138 Paul N. Clark 649,229,974 4,183,073 H. Laurance Fuller 646,543,750 6,869,297 Thomas R. Hodgson 649,236,127 4,176,920 David A. Jones 648,672,816 4,740,231 The Lord Owen CH 649,117,785 4,295,262 Robert L. Parkinson, Jr. 649,186,045 4,227,002 Boone Powell, Jr. 646,617,575 6,795,472 Addison Barry Rand 646,540,057 6,872,990 W. Ann Reynolds, Ph.D. 648,864,446 4,548,601 Roy S. Roberts 648,949,509 4,463,538 William D. Smithburg 645,922,563 7,490,484 John R. Walter 648,186,179 5,226,868 William L. Weiss 646,289,205 7,123,842 Miles D. White 649,259,002 4,154,045 </TABLE> (b) The shareholders approved the adoption of the 1998 Abbott Laboratories Performance Incentive Plan. The number of shares cast in favor of the approval of the 1998 Abbott Laboratories Performance Incentive Plan, the number against, and the number abstaining were as follows: For Against Abstain ----------- ---------- --------- 606,116,758 41,787,264 5,509,025 (c) The shareholders ratified the appointment of Arthur Andersen LLP as auditors of the Company. The number of shares cast in favor of the ratification of Arthur Andersen LLP, the number against, and the number abstaining were as follows: For Against Abstain ----------- ---------- --------- 649,678,052 2,159,959 1,575,036 (d) The shareholders rejected a shareholder proposal that the Company adopt the CERES Principles. The number of shares cast in favor of the shareholder proposal, the number against, the number abstaining, and the number of broker non-votes were as follows: For Against Abstain Broker Non-Vote ---------- ----------- ---------- ---------------- 43,508,171 491,955,075 33,871,791 84,078,010
Item 6. Exhibits and Reports on Form 8-K a) Exhibits 3.1 Articles of Incorporation of Abbott Laboratories, as amended and effective May 1, 1998 - attached hereto. 3.2 Amendment to Articles of Incorporation of Abbott Laboratories - attached hereto. 3.3 By-Laws of Abbott Laboratories, as amended and effective April 24, 1998 - attached hereto. 10.1 1998 Abbott Laboratories Incentive Performance Plan*- attached hereto. 11. Statement re: computation of per share earnings - attached hereto. 12. Statement re: computation of ratio of earnings to fixed charges - attached hereto. 27. Financial Data Schedule - attached hereto. * Denotes management contract or compensatory plan or arrangement required to be filed as an exhibit hereto. b) Reports on Form 8-K None
SIGNATURE Pursuant to the requirements of the Securities and Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. ABBOTT LABORATORIES /s/ Theodore A. Olson ----------------------------------- Date: May 14, 1998 Theodore A. Olson, Vice President and Controller (Principal Accounting Officer)