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 June 30, 2008

 

OR

 

o

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 60064-6400

 

Telephone:  (847) 937-6l00

 

Indicate by check mark whether the registrant: (l) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of l934 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 o

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

 

Large accelerated filer x

 

Accelerated filer o

 

 

 

Non-accelerated filer o

 

Smaller reporting company o

(Do not check if a smaller reporting company)

 

 

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).      Yes o  No x

 

As of June 30, 2008, Abbott Laboratories had 1,541,546,885 common shares without par value outstanding.

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

PART  I.  FINANCIAL INFORMATION

 

Abbott Laboratories and Subsidiaries

 

Condensed Consolidated Financial Statements

 

(Unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

Abbott Laboratories and Subsidiaries

 

Condensed Consolidated Statement of Earnings

 

(Unaudited)

 

(dollars and shares in thousands except per share data)

 

 

 

Three Months Ended

 

Six Months Ended

 

 

 

June 30

 

June 30

 

 

 

2008

 

2007

 

2008

 

2007

 

Net Sales

 

$

7,314,021

 

$

6,370,620

 

$

14,079,624

 

$

12,316,181

 

 

 

 

 

 

 

 

 

 

 

Cost of products sold

 

3,119,700

 

2,804,326

 

6,080,772

 

5,396,337

 

Research and development

 

656,863

 

583,474

 

1,276,820

 

1,202,530

 

Acquired in-process research and development

 

78,556

 

 

97,256

 

 

Selling, general and administrative

 

2,052,317

 

1,796,456

 

4,070,350

 

3,583,325

 

Total Operating Cost and Expenses

 

5,907,436

 

5,184,256

 

11,525,198

 

10,182,192

 

 

 

 

 

 

 

 

 

 

 

Operating Earnings

 

1,406,585

 

1,186,364

 

2,554,426

 

2,133,989

 

 

 

 

 

 

 

 

 

 

 

Interest expense

 

137,769

 

153,349

 

280,303

 

300,891

 

Interest (income)

 

(54,448

)

(28,533

)

(103,804

)

(51,870

)

(Income) from TAP Pharmaceutical Products Inc. joint venture

 

(17,055

)

(115,726

)

(118,997

)

(262,358

)

Net foreign exchange loss (gain)

 

14,472

 

6,248

 

20,693

 

11,099

 

Other (income) expense, net

 

(310,471

)

(81,612

)

(320,813

)

42,924

 

Earnings Before Taxes

 

1,636,318

 

1,252,638

 

2,797,044

 

2,093,303

 

Taxes on Earnings

 

314,304

 

263,894

 

537,163

 

407,022

 

 

 

 

 

 

 

 

 

 

 

Net Earnings

 

$

1,322,014

 

$

988,744

 

$

2,259,881

 

$

1,686,281

 

 

 

 

 

 

 

 

 

 

 

Basic Earnings Per Common Share

 

$

0.86

 

$

0.64

 

$

1.47

 

$

1.09

 

 

 

 

 

 

 

 

 

 

 

Diluted Earnings Per Common Share

 

$

0.85

 

$

0.63

 

$

1.45

 

$

1.08

 

 

 

 

 

 

 

 

 

 

 

Cash Dividends Declared Per Common Share

 

$

0.36

 

$

0.325

 

$

0.72

 

$

0.65

 

 

 

 

 

 

 

 

 

 

 

Average Number of Common Shares Outstanding Used for Basic Earnings Per Common Share

 

1,539,786

 

1,541,717

 

1,541,909

 

1,541,339

 

Dilutive Common Stock Options and Awards

 

13,609

 

18,950

 

15,076

 

18,435

 

 

 

 

 

 

 

 

 

 

 

Average Number of Common Shares Outstanding Plus Dilutive Common Stock Options and Awards

 

1,553,395

 

1,560,667

 

1,556,985

 

1,559,774

 

 

 

 

 

 

 

 

 

 

 

Outstanding Common Stock Options Having No Dilutive Effect

 

48,423

 

4,639

 

6,399

 

4,639

 

 

The accompanying notes to condensed consolidated financial statements are an integral part of this statement.

 

2



 

Abbott Laboratories and Subsidiaries

 

Condensed Consolidated Statement of Cash Flows

 

(Unaudited)

 

(dollars in thousands)

 

 

 

Six Months Ended

 

 

 

June 30

 

 

 

2008

 

2007

 

Cash Flow From (Used in) Operating Activities:

 

 

 

 

 

Net earnings

 

$

2,259,881

 

$

1,686,281

 

Adjustments to reconcile earnings to net cash from operating activities —

 

 

 

 

 

 

 

 

 

 

 

Depreciation

 

534,626

 

463,724

 

Amortization of intangible assets

 

383,088

 

404,201

 

Share-based compensation

 

219,793

 

250,198

 

Gain on dissolution of TAP Pharmaceutical Products Inc. Joint Venture

 

(94,656

)

 

Acquired in-process research and development

 

97,256

 

 

Trade receivables

 

(53,079

)

38,724

 

Inventories

 

(35,087

)

1,001

 

Other, net

 

(248,196

)

(248,387

)

Net Cash From Operating Activities

 

3,063,626

 

2,595,742

 

 

 

 

 

 

 

Cash Flow From (Used in) Investing Activities:

 

 

 

 

 

Acquisitions of property and equipment

 

(703,327

)

(839,850

)

Proceeds from sales of Boston Scientific common stock

 

318,645

 

302,015

 

(Purchases of) proceeds from sales of other investment securities, net

 

(1,209,203

)

(14,377

)

Other

 

(87,322

)

2,573

 

Net Cash (Used in) Investing Activities

 

(1,681,207

)

(549,639

)

 

 

 

 

 

 

Cash Flow From (Used in) Financing Activities:

 

 

 

 

 

Proceeds from issuance of short-term debt and other

 

1,699,869

 

212,721

 

Payments of long-term debt

 

(200,000

)

(347,704

)

Purchases of common shares

 

(1,071,435

)

(863,470

)

Proceeds from stock options exercised, including tax benefit

 

463,169

 

914,134

 

Dividends paid

 

(1,060,186

)

(954,559

)

Net Cash (Used in) Financing Activities

 

(168,583

)

(1,038,878

)

 

 

 

 

 

 

Effect of exchange rate changes on cash and cash equivalents

 

126,366

 

10,514

 

 

 

 

 

 

 

Net Increase in Cash and Cash Equivalents

 

1,340,202

 

1,017,739

 

Cash and Cash Equivalents, Beginning of Year

 

2,456,384

 

521,192

 

Cash and Cash Equivalents, End of Period

 

$

3,796,586

 

$

1,538,931

 

 

The accompanying notes to condensed consolidated financial statements are an integral part of this statement.

 

3



 

Abbott Laboratories and Subsidiaries

 

Condensed Consolidated Balance Sheet

 

(Unaudited)

 

(dollars in thousands)

 

 

 

June 30
2008

 

December 31
2007

 

Assets

 

 

 

 

 

Current Assets:

 

 

 

 

 

Cash and cash equivalents

 

$

3,796,586

 

$

2,456,384

 

Investments, including $307,500 of investments measured at fair value at December 31, 2007

 

1,381,688

 

364,443

 

Trade receivables, less allowances of $276,637 in 2008 and $258,288 in 2007

 

5,189,052

 

4,946,876

 

Inventories:

 

 

 

 

 

Finished products

 

1,752,566

 

1,677,083

 

Work in process

 

790,956

 

681,634

 

Materials

 

617,682

 

592,725

 

Total inventories

 

3,161,204

 

2,951,442

 

Prepaid expenses, deferred income taxes, and other receivables

 

3,428,638

 

3,323,588

 

Total Current Assets

 

16,957,168

 

14,042,733

 

Investments

 

1,091,254

 

1,125,262

 

Property and Equipment, at Cost

 

16,299,707

 

15,597,801

 

Less: accumulated depreciation and amortization

 

8,507,823

 

8,079,652

 

Net Property and Equipment

 

7,791,884

 

7,518,149

 

Intangible Assets, net of amortization

 

6,009,853

 

5,720,478

 

Goodwill

 

10,791,052

 

10,128,841

 

Deferred Income Taxes and Other Assets

 

1,432,508

 

1,178,461

 

 

 

$

44,073,719

 

$

39,713,924

 

 

 

 

 

 

 

Liabilities and Shareholders’ Investment

 

 

 

 

 

Current Liabilities:

 

 

 

 

 

Short-term borrowings

 

$

3,706,123

 

$

1,827,361

 

Trade accounts payable

 

1,180,397

 

1,219,529

 

Salaries, dividends payable, and other accruals

 

5,252,853

 

5,077,428

 

Income taxes payable

 

156,177

 

80,406

 

Current portion of long-term debt

 

1,721,000

 

898,554

 

Total Current Liabilities

 

12,016,550

 

9,103,278

 

 

 

 

 

 

 

Long-term Debt

 

8,458,584

 

9,487,789

 

Post-employment Obligations and Other Long-term Liabilities

 

3,523,801

 

3,344,317

 

Long-term Obligations in Connection With Conclusion of TAP Pharmaceutical Products Inc. Joint Venture

 

1,115,982

 

 

Commitments and Contingencies

 

 

 

 

 

Shareholders’ Investment:

 

 

 

 

 

Preferred shares, one dollar par value
Authorized – 1,000,000 shares, none issued

 

 

 

Common shares, without par value Authorized - 2,400,000,000 shares
Issued at stated capital amount -
Shares: 2008: 1,590,469,383; 2007: 1,580,854,677

 

6,745,205

 

6,104,102

 

Common shares held in treasury, at cost -
Shares: 2008: 48,922,498; 2007: 30,944,537

 

(2,250,693

)

(1,213,134

)

Earnings employed in the business

 

11,963,641

 

10,805,809

 

Accumulated other comprehensive income (loss)

 

2,500,649

 

2,081,763

 

Total Shareholders’ Investment

 

18,958,802

 

17,778,540

 

 

 

$

44,073,719

 

$

39,713,924

 

 

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, 2008

 

(Unaudited)

 

Note 1 – Basis of Presentation

 

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 results of operations, financial position and cash flows have been made.  It is suggested that these statements be read in conjunction with the financial statements included in Abbott’s Annual Report on Form 10-K for the year ended December 31, 2007.

 

Abbott’s core laboratory diagnostics business, including Point of Care, was accounted for as discontinued operations for the six months ended June 30, 2007.  Subsequently, a decision was made to retain the businesses.  The results for the six months ended June 30, 2007 included depreciation and amortization through January 17, 2007.  The amount of depreciation and amortization not recorded in the first six months of 2007 was $99 million, which was recorded in the third quarter of 2007.

 

Note 2 – Supplemental Financial Information

 

In connection with the dissolution of the TAP Pharmaceutical Products Inc. joint venture, Abbott recorded a gain of approximately $95 million in the second quarter 2008, which is included in Other (income) expense, net.  Other (income) expense, net for the second quarter and six months ended June 30, 2008 also includes a gain of approximately $52 million on the sale of an equity investment accounted for as an available-for-sale investment.  The remainder of Other (income) expense, net in 2008 relates primarily to contractual payments based on specified development, approval and commercial events being achieved with respect to products retained by TAP and payments from TAP based on sales of products retained by TAP.

 

Other (income) expense, net for the second quarter of 2007 includes a $48 million fair market value gain adjustment to Abbott’s investment in Boston Scientific stock and a realized gain of $37 million on the sales of Boston Scientific stock.  Other (income) expense, net for the first six months of 2007 includes a $101 million fair market value loss adjustment to Abbott’s investment in Boston Scientific common stock and a realized gain of $37 million on the sales of Boston Scientific stock. 

 

Supplemental Cash Flow Information – In connection with the dissolution of the TAP Pharmaceutical Products Inc. joint venture, Abbott recorded intangible assets of approximately $700 million, goodwill of approximately $350 million, net deferred tax assets of approximately $160 million and a contingent liability of approximately $1.1 billion and derecognized its investment in the TAP Pharmaceutical Products Inc. joint venture of approximately $280 million in the second quarter of 2008.  Other, net in Net cash from operating activities for 2008 and 2007 includes the effects of contributions to the main domestic defined benefit plan of $200 million in each period and to the post-employment medical and dental plans of $65 million and $75 million, respectively. (Purchases of) proceeds from sales of other investment securities, net in 2008 reflects the acquisition of short-term investments with original maturities of over three months.

 

Investments at June 30, 2008 and December 31, 2007 consist of the following:

(dollars in millions)

 

 

 

June 30

 

December 31

 

 

 

2008

 

2007

 

Current Investments:

 

 

 

 

 

Time deposits and certificates of deposit

 

$

1,382

 

$

57

 

Boston Scientific common stock

 

 

307

 

Total

 

$

1,382

 

$

364

 

 

 

 

 

 

 

Long-term Investments:

 

 

 

 

 

Equity securities

 

$

163

 

$

229

 

Note receivable from Boston Scientific, 4% interest, due in 2011

 

857

 

851

 

Other

 

71

 

45

 

Total

 

$

1,091

 

$

1,125

 

 

5



 

Notes to Condensed Consolidated Financial Statements

June 30, 2008

(Unaudited), continued

 

Note 3 – Conclusion of TAP Pharmaceutical Products Inc. Joint Venture

 

On April 30, 2008, Abbott and Takeda concluded their TAP Pharmaceutical Products Inc. (TAP) joint venture, evenly splitting the value and assets of the joint venture.  Abbott exchanged its 50 percent equity interest in TAP for the assets, liabilities and employees related to TAP’s Lupron business.  The Internal Revenue Service has issued a private letter ruling that the transaction qualifies as tax-free for U.S. income tax purposes.

 

Beginning on May 1, 2008, Abbott began recording U.S. Lupron net sales and costs in its operating results and no longer records income from the TAP joint venture.  TAP’s sales of Lupron were $182 million for the four months ended April 30, 2008 and $645 million for the full year 2007.  Abbott will also receive payments based on specified development, approval and commercial events being achieved with respect to products retained by TAP and payments from TAP based on sales of products retained by TAP, which are recorded by Abbott as Other (income) expense, net as earned.  Such payments, which will be subject to tax, are expected to approximate $1.5 billion over a five-year period. 

 

The exchange transaction was accounted for as a sale of Abbott’s equity interest in TAP and as an acquisition of TAP’s Lupron business under SFAS No. 141 “Business Combinations.”  The sale of Abbott’s equity interest in TAP resulted in the recording of net assets of approximately $225 million related to the Lupron business, primarily cash, receivables, inventory and other assets, net of accounts payable and other accrued liabilities, offset by a credit to Abbott’s investment in TAP in the amount of approximately $280 million.

 

For the acquired Lupron business, Abbott recorded intangible assets, primarily Lupron product rights, of approximately $700 million, goodwill of approximately $350 million and deferred tax liabilities related to the intangible assets of approximately $250 million.  The intangible assets are being amortized over 15 years.  Abbott has also agreed to remit cash to TAP if certain research and development events are not achieved on the development assets retained by TAP.  These amounts were recorded as a liability at closing in the amount of approximately $1.1 billion.  Related deferred tax assets of approximately $410 million were also recorded, resulting in an after-tax liability of approximately $700 million.  If these payments are not required, the liability would be reduced and a gain would be recorded.

 

The exchange of Abbott’s investment in TAP for TAP’s Lupron business resulted in a gain at closing of approximately $95 million, which is in addition to the amounts discussed in the second paragraph above. The valuation of the assets and liabilities is preliminary and is expected to be finalized in the third quarter.

 

The 50 percent-owned joint venture was accounted for under the equity method of accounting.  Summarized financial information for TAP follows below (in millions).  The results for 2008 include results through April 30.

 

 

 

Three Months Ended June 30

 

Six Months Ended June 30

 

 

 

2008

 

2007

 

2008

 

2007

 

Net sales

 

$

141

 

$

767

 

$

853

 

$

1,516

 

Cost of sales

 

46

 

188

 

229

 

368

 

Income before taxes

 

35

 

365

 

356

 

826

 

Net earnings

 

34

 

232

 

238

 

525

 

 

Note 4 – Acquired In-process Research and Development

 

In the first half of 2008, technology investments and acquired product rights resulted in charges to acquired in-process research and development of approximately $97 million.

 

Note 5 – Taxes on Earnings

 

Taxes on earnings reflect the estimated annual effective rates and include charges for interest and penalties.  The effective tax rates are less than the statutory U.S. federal income tax rate principally due to the domestic dividend exclusion in 2007 and the benefit of lower statutory tax rates and tax exemptions in several taxing jurisdictions.  In the second quarter of 2008, Abbott’s federal income tax returns for 2004 and 2005 were settled, resulting in a net reduction of income taxes of approximately $30 million.

 

6



 

Notes to Condensed Consolidated Financial Statements

June 30, 2008

(Unaudited), continued

 

Note 6 – Litigation and Environmental Matters

 

Abbott 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.  Abbott has recorded an estimated cleanup cost for each site for which management believes Abbott has a probable loss exposure.  No individual site cleanup exposure is expected to exceed $3 million, and the aggregate cleanup exposure is not expected to exceed $15 million.

 

There are a number of patent disputes with third parties who claim Abbott’s products infringe their patents.  In one of those disputes, filed in April 2007, Abbott is unable to estimate a range of possible loss, if any, and no reserve has been recorded.  Abbott’s acquisition of Kos Pharmaceuticals Inc. resulted in the assumption of various cases and investigations and Abbott has recorded reserves related to several of those cases and investigations.

 

There are several civil actions pending brought by individuals or entities that allege generally that Abbott and numerous pharmaceutical companies reported false or misleading pricing information relating to the average wholesale price of certain pharmaceutical products in connection with federal, state and private reimbursement.  Civil actions have also been brought against Abbott, and in some cases other members of the pharmaceutical industry, by state attorneys general seeking to recover alleged damages on behalf of state Medicaid programs.  In May 2006, Abbott was notified that the U.S. Department of Justice intervened in a civil whistle-blower lawsuit alleging that Abbott inflated prices for Medicaid and Medicare reimbursable drugs.  Abbott has recorded reserves for its estimated losses in a few of the cases, however, Abbott is unable to estimate the range or amount of possible loss for the majority of the cases, and no loss reserves have been recorded for them.  Many of the products involved in these cases are Hospira products.  Hospira, Abbott’s former hospital products business, was spun off to Abbott’s shareholders in 2004.  Abbott retained liability for losses that result from these cases and investigations to the extent any such losses both relate to the sale of Hospira’s products prior to the spin-off of Hospira and relate to allegations that were made in such pending and future cases and investigations that were the same as allegations existing at the date of the spin-off.

 

There are several civil actions pending brought by state attorneys general and private entities alleging antitrust and unfair competition claims in connection with the sales of TriCor. Abbott licenses TriCor from a third party and the licensor has also been named as a defendant.  There are several civil actions pending brought by private payers and others alleging antitrust claims in connection with the pricing of Norvir.  Abbott is unable to estimate a range of loss, if any, and no loss reserves have been recorded.

 

Within the next year, legal proceedings may occur that may result in a change in the estimated reserves recorded by Abbott.  For its legal proceedings and environmental exposures, except as noted above, Abbott estimates the range of possible loss to be from approximately $155 million to $345 million.  The recorded reserve balance at June 30, 2008 for these proceedings and exposures was approximately $195 million.  These reserves represent management’s best estimate of probable loss, as defined by Statement of Financial Accounting Standards No. 5, “Accounting for Contingencies.”

 

While it is not feasible to predict the outcome of all such proceedings and exposures with certainty, management believes that their ultimate disposition should not have a material adverse effect on Abbott’s financial position, cash flows, or results of operations, except for the cases and investigations discussed in the third paragraph and the patent case discussed in the second paragraph of this footnote, the resolution of which could be material to cash flows or results of operations for a quarter.

 

7



 

Notes to Condensed Consolidated Financial Statements

June 30, 2008

(Unaudited), continued

 

Note 7 – Post-Employment Benefits

(dollars in millions)

 

Retirement plans consist of defined benefit, defined contribution, and medical and dental plans.  Net cost for the three and six months ended June 30 for Abbott’s major defined benefit plans and post-employment medical and dental benefit plans is as follows:

 

 

 

Defined Benefit Plans

 

Medical and Dental Plans

 

 

 

Three Months

 

Six Months

 

Three Months

 

Six Months

 

 

 

Ended June 30

 

Ended June 30

 

Ended June 30

 

Ended June 30

 

 

 

2008

 

2007

 

2008

 

2007

 

2008

 

2007

 

2008

 

2007

 

Service cost — benefits earned during the period

 

$

55

 

$

61

 

$

115

 

$

121

 

$

11

 

$

15

 

$

23

 

$

30

 

Interest cost on projected benefit obligations

 

84

 

76

 

170

 

151

 

22

 

25

 

48

 

49

 

Expected return on plans’ assets

 

(120

)

(103

)

(239

)

(205

)

(8

)

(6

)

(16

)

(13

)

Net amortization

 

5

 

22

 

18

 

44

 

1

 

8

 

6

 

17

 

Net Cost

 

$

24

 

$

56

 

$

64

 

$

111

 

$

26

 

$

42

 

$

61

 

$

83

 

 

Abbott funds its domestic defined benefit plans according to IRS funding limitations.  In the first quarters of 2008 and 2007, $200 was contributed to the main domestic defined benefit plan and $65 and $75, respectively, was contributed to the post-employment medical and dental benefit plans.

 

Note 8 – Comprehensive Income, net of tax

(dollars in millions)

 

 

 

Three Months Ended

 

Six Months Ended

 

 

 

June 30

 

June 30

 

 

 

2008

 

2007

 

2008

 

2007

 

Foreign currency translation gain adjustments

 

$

242

 

$

247

 

$

433

 

$

263

 

Unrealized (losses) gains on marketable equity securities

 

(2

)

(6

)

(27

)

1

 

Amortization of net actuarial losses and prior service cost and credits

 

4

 

20

 

16

 

40

 

Net adjustments for derivative instruments designated as cash flow hedges

 

2

 

(15

)

(4

(9

)

Other comprehensive income, net of tax

 

246

 

246

 

418

 

295

 

Net Earnings

 

1,322

 

989

 

2,260

 

1,686

 

Comprehensive Income

 

$

1,568

 

$

1,235

 

$

2,678

 

$

1,981

 

 

 

 

 

 

 

 

 

 

 

Supplemental Comprehensive Income Information, net of tax:

 

 

 

 

 

 

 

 

 

Cumulative foreign currency translation (gain) adjustments

 

 

 

 

 

 

$

(3,381

)

$

(2,059

)

Net actuarial losses and prior service cost and credits

 

 

 

 

 

899

 

1,217

 

Cumulative unrealized (gains) on marketable equity securities

 

 

 

 

 

(39

)

(14

)

Cumulative losses (gains) on derivative instruments designated as cash flow hedges

 

 

 

 

 

21

 

(12

)

 

8



 

Notes to Condensed Consolidated Financial Statements

June 30, 2008

(Unaudited), continued

 

Note 9 – Segment Information

(dollars in millions)

 

Abbott’s principal business is the discovery, development, manufacture and sale of a broad line of health care products.  Abbott’s products are generally sold directly to retailers, wholesalers, hospitals, health care facilities, laboratories, physicians’ offices and government agencies throughout the world.  Abbott’s reportable segments are as follows:

 

Pharmaceutical Products — Worldwide sales of a broad line of pharmaceuticals.  For segment reporting purposes, two pharmaceutical divisions are aggregated and reported as the Pharmaceutical Products segment.

 

Nutritional Products — Worldwide sales of a broad line of adult and pediatric nutritional products.

 

Diagnostic Products – Worldwide sales of diagnostic systems and tests for blood banks, hospitals, commercial laboratories and alternate-care testing sites.  For segment reporting purposes, three diagnostic divisions are aggregated and reported as the Diagnostic Products segment.

 

Vascular Products – Worldwide sales of coronary, endovascular, vessel closure and other products.

 

Abbott’s underlying accounting records are maintained on a legal entity basis for government and public reporting requirements.  Segment disclosures are on a performance basis consistent with internal management reporting.  Intersegment transfers of inventory are recorded at standard cost and are not a measure of segment operating earnings.  The cost of some corporate functions and the cost of certain employee benefits are charged to segments at predetermined rates that approximate cost.  Remaining costs, if any, are not allocated to segments.  For acquisitions prior to 2006, substantially all intangible assets and related amortization are not allocated to segments.  The following segment information has been prepared in accordance with the internal accounting policies of Abbott, as described above, and are not presented in accordance with generally accepted accounting principles applied to the consolidated financial statements.

 

 

 

Net Sales to External Customers

 

Operating Earnings (Loss)

 

 

 

Three Months

 

Six Months

 

Three Months

 

Six Months

 

 

 

Ended June 30

 

Ended June 30

 

Ended June 30

 

Ended June 30

 

 

 

2008

 

2007

 

2008

 

2007

 

2008

 

2007

 

2008

 

2007

 

Pharmaceuticals

 

$

4,123

 

$

3,532

 

$

7,978

 

$

6,904

 

$

1,541

 

$

1,330

 

$

2,886

 

$

2,493

 

Nutritionals (a)

 

1,235

 

1,097

 

2,344

 

2,099

 

193

 

229

 

376

 

410

 

Diagnostics

 

936

 

799

 

1,768

 

1,509

 

102

 

68

 

155

 

94

 

Vascular

 

489

 

423

 

941

 

844

 

47

 

(29

)

16

 

(52

)

Total Reportable Segments

 

6,783

 

5,851

 

13,031

 

11,356

 

1,883

 

1,598

 

3,433

 

2,945

 

Other

 

531

 

520

 

1,049

 

960

 

 

 

 

 

 

 

 

 

Net Sales

 

$

7,314

 

$

6,371

 

$

14,080

 

$

12,316

 

 

 

 

 

 

 

 

 

Corporate functions and benefit plans costs

 

 

 

 

 

 

 

 

 

(97

)

(137

)

(210

)

(226

)

Non-reportable segments

 

 

 

 

 

 

 

 

 

41

 

114

 

113

 

178

 

Net interest expense

 

 

 

 

 

 

 

 

 

(83

)

(125

)

(176

)

(249

)

Acquired in-process research and development

 

 

 

 

 

 

 

 

 

(79

)

 

(97

)

 

Income from TAP Pharmaceutical Products Inc. joint venture

 

 

 

 

 

 

 

 

 

17

 

116

 

119

 

262

 

Share-based compensation (b)

 

 

 

 

 

 

 

 

 

(68

)

(87

)

(220

)

(250

)

Other, net (c)

 

 

 

 

 

 

 

 

 

22

 

(226

)

(165

)

(567

)

Consolidated Earnings Before Taxes

 

 

 

 

 

 

 

 

 

$

1,636

 

$

1,253

 

$

2,797

 

$

2,093

 

 


(a)          Operating earnings in 2008 for the Nutritional Products segment were impacted by higher commodity costs.

(b)         Approximately 40 to 45 percent of the annual cost of share-based awards will typically be recognized in the first quarter due to the timing of the granting of share-based awards.

(c)          Other, net for the three months and six months ended June 30, 2008, includes the gain from the closing of the TAP joint venture and contractual payments from TAP associated with the closing of the TAP Pharmaceutical Products Inc. joint venture.  Other, net for the three months and six months ended June 30, 2007, includes acquisition integration expenses related to the acquisitions of Guidant’s vascular intervention and endovascular solutions businesses and Kos Pharmaceuticals Inc. and the reversal of depreciation on property and equipment classified as held for sale that was recorded by the Diagnostics segment.

 

9



 

Notes to Condensed Consolidated Financial Statements

June 30, 2008

(Unaudited), continued

 

Note 10 – Incentive Stock Programs

 

In the first six months of 2008, Abbott granted 20,069,002 stock options, 1,797,028 replacement stock options, 809,650 restricted stock awards and 541,874 restricted stock units under this program.  At June 30, 2008, approximately 28 million shares were reserved for future grants.  Information regarding the number of options outstanding and exercisable at June 30, 2008 is as follows:

 

 

 

Outstanding

 

Exercisable

 

Number of shares

 

141,007,220

 

99,290,665

 

Weighted average remaining life (years)

 

6.7

 

5.7

 

Weighted average exercise price

 

$

48.66

 

$

46.94

 

Aggregate intrinsic value (in millions)

 

$

709

 

$

640

 

 

The total unrecognized share-based compensation cost at June 30, 2008 amounted to approximately $329 million which is expected to be recognized over the next three years.

 

Note 11 – Goodwill and Intangible Assets

(dollars in millions)

 

In connection with the dissolution of the TAP Pharmaceutical Products Inc. joint venture, Abbott recorded approximately $350 of goodwill.  Foreign currency translation adjustments and other adjustments increased goodwill in the first six months of 2008 and 2007 by approximately $312 and $129, respectively.  There were no reductions of goodwill relating to impairments or disposal of all or a portion of a business.  The amount of goodwill related to reportable segments at June 30, 2008 was $6,806 for the Pharmaceutical Products segment, $206 for the Nutritional Products segment, $262 for the Diagnostic Products segment and $2,166 for the Vascular Products segment.

 

The gross amount of amortizable intangible assets, primarily product rights and technology was $9,713 as of June 30, 2008 and $9,043 as of December 31, 2007, and accumulated amortization was $3,703 as of June 30, 2008 and $3,323 as of December 31, 2007.  The estimated annual amortization expense for intangible assets is approximately $775 in 2008, $785 in 2009 and approximately $770 in 2010, 2011 and 2012.  Intangible assets are amortized over 4 to 25 years (average 11 years).

 

Note 12 – Restructuring Plans

(dollars in millions)

 

In 2007, 2006 and 2005, Abbott management approved plans to realign its worldwide pharmaceutical manufacturing operations and selected domestic and international commercial and research and development operations in order to reduce costs.  Additional charges of $44 and $67 were subsequently recorded in the first six months of 2008 and 2007, respectively, relating to these restructurings, primarily for accelerated depreciation.  In addition, Abbott implemented facilities restructuring plans in the second quarter of 2007 related to the acquired operations of Kos Pharmaceuticals Inc., which resulted in an increase to goodwill of approximately $52.  The following summarizes the activity for restructurings:

 

 

 

2008

 

2007

 

Accrued balance at January 1

 

$

194

 

$

193

 

Restructuring charges

 

11

 

59

 

Payments and other adjustments

 

(59

)

(63

)

Accrued balance at June 30

 

$

146

 

$

189

 

 

10



 

Notes to Condensed Consolidated Financial Statements

June 30, 2008

(Unaudited), continued

 

Note 13 – Fair Value Measures

(dollars in millions)

 

The following table summarizes the bases used to measure certain assets and liabilities at fair value on a recurring basis in the balance sheet:

 

 

 

 

 

Basis of Fair Value Measurement

 

 

 

Outstanding
Balances

 

Quoted
Prices in
Active
Markets

 

Significant
Other
Observable
Inputs

 

Significant
Unobservable
Inputs

 

June 30, 2008:

 

 

 

 

 

 

 

 

 

Marketable available-for-sale securities

 

$

219

 

$

163

 

$

23

 

$

33

 

Foreign currency forward exchange contracts

 

34

 

 

34

 

 

Financial assets relating to TAP employees’ stock options

 

29

 

 

 

29

 

Total Assets

 

$

282

 

$

163

 

$

57

 

$

62

 

Fair value of hedged long-term debt

 

$

2,443

 

$

 

$

2,443

 

$

 

Foreign currency forward exchange contracts

 

20

 

 

20

 

 

Interest rate swap financial instruments

 

57

 

 

57

 

 

Financial liabilities relating to TAP employees’ stock options

 

42

 

 

 

42

 

Total Liabilities

 

$

2,562

 

$

 

$

2,520

 

$

42

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2007:

 

 

 

 

 

 

 

 

 

Trading securities

 

$

308

 

$

308

 

$

 

$

 

Marketable available-for-sale securities

 

193

 

193

 

 

 

Foreign currency forward exchange contracts

 

24

 

 

24

 

 

Total Assets

 

$

525

 

$

501

 

$

24

 

$

 

Interest rate swap financial instruments

 

$

25

 

$

 

$

25

 

$

 

Fair value of hedged long-term debt

 

1,475

 

 

1,475

 

 

Foreign currency forward exchange contracts

 

45

 

 

45

 

 

Total Liabilities

 

$

1,545

 

$

 

$

1,545

 

$

 

 

In connection with the conclusion of the TAP Pharmaceutical Products Inc. joint venture, Abbott recorded derivative financial assets and liabilities related to stock options previously granted to TAP’s employees.  The amounts of these assets and liabilities were calculated using both the Black-Scholes option–pricing model and the intrinsic value of the options.  From April 30, 2008 to June 30, 2008 both the assets and liabilities decreased by approximately $11 million.  The effect of the changes in these assets and liabilities offset each other.  In addition, Abbott received investments that are valued using significant unobservable inputs. The recorded value of these investments did not change significantly during the quarter.

 

11



 

FINANCIAL REVIEW

 

Results of Operations

 

The following table details sales by reportable segment for the three months and six months ended June 30.  Percent changes are versus the prior year and are based on unrounded numbers.

(dollars in millions)

 

 

 

Three Months Ended June 30

 

Six Months Ended June 30

 

 

 

2008

 

Percent
Change

 

2007

 

Percent
Change

 

2008

 

Percent
Change

 

2007

 

Percent
Change

 

Pharmaceutical Products

 

$

4,123

 

16.7

 

$

3,532

 

17.2

 

$

7,978

 

15.5

 

$

6,904

 

16.9

 

Nutritional Products

 

1,235

 

12.6

 

1,097

 

4.6

 

2,344

 

11.7

 

2,099

 

(4.2

)

Diagnostic Products

 

936

 

17.2

 

799

 

11.4

 

1,768

 

17.1

 

1,509

 

10.8

 

Vascular Products

 

489

 

15.7

 

423

 

63.3

 

941

 

11.6

 

844

 

146.6

 

Total Reportable Segments

 

6,783

 

15.9

 

5,851

 

16.1

 

13,031

 

14.8

 

11,356

 

15.9

 

Other

 

531

 

2.2

 

520

 

12.2

 

1,049

 

9.1

 

960

 

8.8

 

Net Sales

 

$

7,314

 

14.8

 

$

6,371

 

15.8

 

$

14,080

 

14.3

 

$

12,316

 

15.3

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total U.S

 

$

3,410

 

5.7

 

$

3,225

 

17.7

 

$

6,452

 

4.8

 

$

6,158

 

13.8

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total International

 

$

3,904

 

24.1

 

$

3,146

 

13.9

 

$

7,628

 

23.9

 

$

6,158

 

16.8

 

 

Worldwide sales for the second quarter and six months 2008 compared to 2007 reflects unit growth and the positive effect of the relatively weaker U.S. dollar.  The relatively weaker U.S. dollar increased second quarter 2008 consolidated net sales by 5.9 percent, Total International sales by 12.0 percent, Pharmaceutical Products segment sales by 6.0 percent, Diagnostic Products segment sales by 9.2 percent and Vascular Products segment sales by 6.4 percent over the second quarter of 2007.  The relatively weaker U.S. dollar also increased the first six months 2008 consolidated net sales by 5.7 percent, Total International sales by 11.5 percent, Pharmaceutical Products segment sales by 6.0 percent, Diagnostic Products segment sales by 8.7 percent and Vascular Products segment sales by 5.6 percent over the first six months of 2007.  The relatively weaker U.S. dollar increased second quarter 2007 consolidated net sales by 2.7 percent, Total International sales by 5.3 percent, Pharmaceutical Products segment sales by 2.7 percent, Diagnostic Products segment sales by 3.8 percent and Vascular Products segment sales by 2.2 percent over the second quarter of 2006.  The relatively weaker U.S. dollar also increased the first six months 2007 consolidated net sales by 2.7 percent, Total International sales by 5.4 percent, Pharmaceutical Products segment sales by 2.7 percent, Diagnostic Products segment sales by 3.9 percent and Vascular Products segment sales by 2.3 percent over the first six months of 2006.  Sales growth in 2007 for the Nutritional Products segment was unfavorably impacted by the completion of the co-promotion of Synagis in 2006.

 

12



 

FINANCIAL REVIEW

(continued)

 

A comparison of significant product group sales for the six months ended June 30 is as follows.  Percent changes are versus the prior year and are based on unrounded numbers.

(dollars in millions)

 

 

 

Six Months Ended June 30

 

 

 

 

 

Percent

 

 

 

Percent

 

 

 

2008

 

Change

 

2007

 

Change

 

Pharmaceutical Products —

 

 

 

 

 

 

 

 

 

U.S. Specialty

 

$

2,341

 

19.5

 

$

1,958

 

26.1

 

U.S. Primary Care

 

1,411

 

(8.1

)

1,535

 

38.9

 

International Pharmaceuticals

 

3,743

 

27.0

 

2,948

 

12.9

 

 

 

 

 

 

 

 

 

 

 

Nutritional Products —

 

 

 

 

 

 

 

 

 

U.S. Pediatric Nutritionals

 

615

 

5.7

 

582

 

6.1

 

International Pediatric Nutritionals

 

634

 

22.9

 

516

 

18.6

 

U.S. Adult Nutritionals

 

562

 

3.3

 

544

 

(0.8

)

International Adult Nutritionals

 

520

 

18.9

 

437

 

12.3

 

 

 

 

 

 

 

 

 

 

 

Diagnostics —

 

 

 

 

 

 

 

 

 

Immunochemistry

 

1,411

 

17.3

 

1,203

 

10.8

 

 

Increased sales of HUMIRA and Depakote and the addition of Lupron sales in 2008 accounted for the majority of the sales increases for U.S. Specialty products in both 2008 and 2007.  U.S. sales of HUMIRA were $927 million, $696 million and $501 million for the six months ended June 30, 2008, 2007 and 2006, respectively.  U.S. Primary Care sales in 2008 were impacted by a significant decrease in sales of Omnicef due to generic competition, partially offset by increased sales of Niaspan and TriCor.  U.S. Primary Care sales in 2007 were favorably impacted by sales of Niaspan, a new product from the acquisition of Kos Pharmaceuticals Inc. in the fourth quarter of 2006, and TriCor and were unfavorably impacted by decreased sales of Biaxin.   Increased sales of HUMIRA favorably impacted International Pharmaceutical sales in both 2008 and 2007.  International sales of HUMIRA were $1.039 billion, $611 million and $382 million for the six months ended June 30, 2008, 2007 and 2006, respectively.  International Pediatric Nutritionals sales increases in 2008 and 2007 were due primarily to volume growth in developing countries.  The favorable effect of the relatively weaker U.S. dollar favorably impacted international product sales growth in both years.

 

The gross profit margin was 57.3 percent for the second quarter 2008, compared to 56.0 percent for the second quarter 2007.  First six months 2008 gross profit margin was 56.8 percent, compared to 56.2 percent for the first six months 2007.  The increases in the gross profit margins in 2008 were due primarily to favorable product and business mix.

 

Research and development expenses increased 12.6 percent in the second quarter 2008 and 6.2 percent for the first six months 2008 over comparable 2007 periods.  These increases reflect increased spending to support pipeline programs, including oncology, immunology, hepatitis C, neuroscience and drug eluting stents.  The majority of research and development expenditures is concentrated on pharmaceutical products.

 

Selling, general and administrative expenses for the second quarter and first six months 2008 increased 14.2 percent and 13.6 percent, respectively, over the comparable 2007 periods.   These increases reflect increased selling and marketing support for new and existing products, including continued spending for HUMIRA and the U.S. launch of Xience V, as well as spending on other marketed pharmaceutical products. 

 

13



 

FINANCIAL REVIEW

(continued)

 

Conclusion of TAP Pharmaceutical Products Inc. Joint Venture

 

On April 30, 2008, Abbott and Takeda concluded their TAP Pharmaceutical Products Inc. (TAP) joint venture, evenly splitting the value and assets of the joint venture.  Abbott exchanged its 50 percent equity interest in TAP for the assets, liabilities and employees related to TAP’s Lupron business.  The Internal Revenue Service has issued a private letter ruling that the transaction qualifies as tax-free for U.S. income tax purposes.

 

Beginning on May 1, 2008, Abbott began recording U.S. Lupron net sales and costs in its operating results and no longer records income from the TAP joint venture.  TAP’s sales of Lupron were $182 million for the four months ended April 30, 2008 and $645 million for the full year 2007.  Abbott expects to record U.S. sales of Lupron of approximately $400 million in 2008.  Abbott will also receive payments based on specified development, approval and commercial events being achieved with respect to products retained by TAP and payments from TAP based on sales of products retained by TAP, which are recorded by Abbott as Other (income) expense, net as earned.  Such payments, which will be subject to tax, are expected to approximate $1.5 billion over a five-year period.

 

The exchange transaction was accounted for as a sale of Abbott’s equity interest in TAP and as an acquisition of TAP’s Lupron business under SFAS No. 141 “Business Combinations.”  The sale of Abbott’s equity interest in TAP resulted in the recording of net assets of approximately $225 million related to the Lupron business, primarily cash, receivables, inventory and other assets, net of accounts payable and other accrued liabilities, offset by a credit to Abbott’s investment in TAP in the amount of approximately $280 million.

 

For the acquired Lupron business, Abbott recorded intangible assets, primarily Lupron product rights, of approximately $700 million, goodwill of approximately $350 million and deferred tax liabilities related to the intangible assets of approximately $250 million.  The intangible assets are being amortized over 15 years.  Abbott has also agreed to remit cash to TAP if certain research and development events are not achieved on the development assets retained by TAP.  These amounts were recorded as a liability at closing in the amount of approximately $1.1 billion.  Related deferred tax assets of approximately $410 million were also recorded, resulting in an after-tax liability of approximately $700 million.  If these payments are not required, the liability would be reduced and a gain would be recorded.

 

The exchange of Abbott’s investment in TAP for TAP’s Lupron business resulted in a gain at closing of approximately $95 million, which is in addition to the amounts discussed in the second paragraph above.  The valuation of the assets and liabilities is preliminary and is expected to be finalized in the third quarter.

 

The 50 percent-owned joint venture was accounted for under the equity method of accounting.  Summarized financial information for TAP follows below (in millions).  The results for 2008 include results through April 30.

 

 

 

Three Months Ended June 30

 

Six Months Ended June 30

 

 

 

2008

 

2007

 

2008

 

2007

 

Net sales

 

$

141

 

$

767

 

$

853

 

$

1,516

 

Cost of sales

 

46

 

188

 

229

 

368

 

Income before taxes

 

35

 

365

 

356

 

826

 

Net earnings

 

34

 

232

 

238

 

525

 

 

Restructurings

(dollars in millions)

 

In 2007, 2006 and 2005, Abbott management approved plans to realign its worldwide pharmaceutical manufacturing operations and selected domestic and international commercial and research and development operations in order to reduce costs.  Additional charges of $44 and $67 were subsequently recorded in the first six months of 2008 and 2007, respectively, relating to these restructurings, primarily for accelerated depreciation.  In addition, Abbott implemented facilities restructuring plans in the second quarter of 2007 related to the acquired operations of Kos Pharmaceuticals Inc., which resulted in an increase to goodwill of approximately $52.  The following summarizes the activity for restructurings:

 

 

 

2008

 

2007

 

 

 

 

 

Accrued balance at January 1

 

$

194

 

$

193

 

 

 

 

 

Restructuring charges

 

11

 

59

 

 

 

 

 

Payments and other adjustments

 

(59

)

(63

)

 

 

 

 

Accrued balance at June 30

 

$

146

 

$

189

 

 

 

 

 

 

14



 

FINANCIAL REVIEW

(continued)

 

Basis of Presentation

 

Abbott’s core laboratory diagnostics business, including Point of Care, was accounted for as discontinued operations for the six months ended June 30, 2007.  Subsequently, a decision was made to retain the businesses.  The results for the six months ended June 30, 2007 included depreciation and amortization through January 17, 2007.  The amount of depreciation and amortization not recorded in the first six months of 2007 was $99 million, which was recorded in the third quarter of 2007.

 

Acquired In-process Research and Development

 

In the first half of 2008, technology investments and acquired product rights resulted in charges to acquired in-process research and development of approximately $97 million.

 

Interest (Income)

 

Interest income increased in the second quarter and first six months of 2008 over 2007 primarily as the result of higher investment balances.

 

Other (income) expense, net

 

In connection with the dissolution of the TAP Pharmaceutical Products Inc. joint venture, Abbott recorded a gain of approximately $95 million in the second quarter 2008, which is included in Other (income) expense, net.  Other (income) expense, net for the second quarter and six months ended June 30, 2008 also includes a gain of approximately $52 million on the sale of an equity investment accounted for as an available-for-sale investment.  The remainder of Other (income) expense, net in 2008 relates primarily to contractual payments based on specified development, approval and commercial events being achieved with respect to products retained by TAP and payments from TAP based on sales of products retained by TAP.

 

Other (income) expense, net for the second quarter of 2007 includes a $48 million fair market value gain adjustment to Abbott’s investment in Boston Scientific stock and a realized gain of $37 million on the sales of Boston Scientific stock.  Other (income) expense, net for the first six months of 2007 includes a $101 million fair market value loss adjustment to Abbott’s investment in Boston Scientific common stock and a realized gain of $37 million on the sales of Boston Scientific stock. 

 

Taxes on Earnings

 

Taxes on earnings reflect the estimated annual effective rates.  The effective tax rates are less than the statutory U.S. federal income tax rate principally due to the domestic dividend exclusion in 2007 and the benefit of lower statutory tax rates and tax exemptions in several taxing jurisdictions. In the second quarter of 2008, Abbott’s federal income tax returns for 2004 and 2005 were settled, resulting in a net reduction of income taxes of approximately $30 million.

 

15



 

FINANCIAL REVIEW

(continued)

 

Liquidity and Capital Resources at June 30, 2008 Compared with December 31, 2007

 

Net cash from operating activities for the first six months 2008 totaled approximately $3.1 billion.  Abbott expects annual cash flow from operating activities to continue to exceed Abbott’s capital expenditures and cash dividends.  Subsequent to June 30, 2008, Abbott paid $250 million to Boston Scientific as a result of the FDA’s approval to market the Xience V drug-eluting stent in the U.S.  This payment will result in an increase in goodwill.

 

Working capital was $4.9 billion at June 30, 2008 and December 31, 2007.

 

For the acquired Lupron business, Abbott recorded intangible assets, primarily Lupron product rights, of approximately $700 million, goodwill of approximately $350 million and deferred tax liabilities related to the intangible assets of approximately $250 million.  Abbott also recorded a liability of approximately $1.1 billion relating to an agreement to remit cash to TAP if certain research and development events are not achieved on the development assets retained by TAP.  Related deferred tax assets of approximately $410 million were also recorded, resulting in an after-tax liability of approximately $700 million.  If these payments are not required, the liability would be reduced and a gain would be recorded.

 

At June 30, 2008, Abbott’s long-term debt rating was AA by Standard & Poor’s Corporation and A1 by Moody’s Investors Service.  Abbott has readily available financial resources, including unused lines of credit of $4.0 billion that support commercial paper borrowing arrangements.

 

In 2006, the board of directors authorized the purchase of $2.5 billion of Abbott’s common shares from time to time.  During the first six months of 2008 and 2007, Abbott purchased approximately 19.0 million and 15.4 million, respectively, of its common shares at a cost of approximately $1.1 billion and $827 million, respectively.

 

Under a registration statement filed with the Securities and Exchange Commission in February 2006, Abbott may offer and sell from time to time debt securities in one or more offerings through February 2009.

 

Legislative Issues

 

Abbott’s primary markets are highly competitive and subject to substantial government regulation throughout the world.  Abbott expects debate to continue over the availability, method of delivery, and payment for health care products and services.  Abbott believes that if legislation is enacted, it could have the effect of reducing access to health care products and services, or reducing prices or the rate of price increases for health care products and services.  It is not possible to predict the extent to which Abbott 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, and Item 1A, Risk Factors on Form 10-K for the year ended December 31, 2007.

 

Private Securities Litigation Reform Act of 1995 — A Caution Concerning Forward-Looking Statements

 

Under the safe harbor provisions of the Private Securities Litigation Reform Act of 1995, Abbott cautions investors that any forward-looking statements or projections made by Abbott, including those made in this document, are subject to risks and uncertainties that may cause actual results to differ materially from those projected. Economic, competitive, governmental, technological and other factors that may affect Abbott’s operations are discussed in Item 1A, Risk Factors to the Annual Report on Form 10-K for the year ended December 31, 2007.

 

16



 

PART I.  FINANCIAL INFORMATION

 

Item 4.  Controls and Procedures

 

(a)     Evaluation of disclosure controls and procedures.  The Chief Executive Officer, Miles D. White, and Chief Financial Officer, Thomas C. Freyman, evaluated the effectiveness of Abbott Laboratories’ disclosure controls and procedures as of the end of the period covered by this report, and concluded that Abbott Laboratories’ disclosure controls and procedures were effective to ensure that information Abbott is required to disclose in the reports that it files or submits with the Securities and Exchange Commission under the Securities Exchange Act of 1934 (the “Exchange Act”) is recorded, processed, summarized and reported, within the time periods specified in the Commission’s rules and forms, and to ensure that information required to be disclosed by Abbott in the reports that it files or submits under the Exchange Act is accumulated and communicated to Abbott’s management, including its principal executive officer and principal financial officer, as appropriate to allow timely decisions regarding required disclosure.

 

(b)    Changes in internal control over financial reporting.  During the quarter ended June 30, 2008, there were no changes in Abbott’s internal control over financial reporting (as defined in Rule 13a-15(f) under the Exchange Act) that have materially affected, or are reasonably likely to materially affect, Abbott’s internal control over financial reporting.

 

17



 

PART II.    OTHER INFORMATION

 

Item 1.             Legal Proceedings

 

Abbott is involved in various claims, legal proceedings and investigations, including (as of June 30, 2008, except as otherwise indicated) those described below.

 

In April 2008, the case Patrick Warren Proffitt, et. al. was filed against Abbott in the Circuit Court for Cocke County, Tennessee alleging antitrust and consumer fraud claims in connection with the sale of fenofibrate formulations.  The case has been brought as a purported class action on behalf of all Tennessee individuals who purchased Tricor® or a generic substitute during the period from 1998 through 2008.  In May 2008, the case was removed to the United States District Court for the Eastern District of Tennessee.

 

In its 2007 Form 10-K, Abbott reported that a number of cases are pending that allege generally that Abbott and numerous other pharmaceutical companies reported false pricing information in connection with certain drugs that are reimbursable under Medicare and Medicaid and by private payors and that the federal cases have been consolidated in the United States District Court for the District of Massachusetts as In re:  Pharmaceutical Industry Average Wholesale Price Litigation, MDL 1456.  In June 2008, one of those consolidated cases, an action brought by the Utah Attorney General against Abbott and other manufacturers, was remanded to state court in Utah.

 

In its 2007 Form 10-K, Abbott reported that a purported derivative lawsuit was pending in the United States District Court for the Northern District of Illinois brought by Leonard Bronstein, an Abbott shareholder, on behalf of Abbott against Abbott and each member of its Board of Directors.  In May 2008, the court dismissed this case.

 

In its 2007 Form 10-K, Abbott reported that litigation was pending in the United Kingdom in which Abbott was seeking a declaration that Abbott’s original (as of 2006) and modified Multi-Link Vision® and Xience V™ coronary stent systems do not infringe Evysio’s three patents and that Evysio’s patents are invalid.  Abbott also reported that Evysio had filed a counterclaim accusing Abbott’s stents of infringement and seeking a declaration of validity. On April 21, 2008, the court in the United Kingdom issued a final judgment, not subject to appeal, holding that Abbott’s modified design stents do not infringe any of the three Evysio patents, that two of the Evysio patents are invalid, and that Abbott’s original design stents do not infringe Evysio’s only valid patent.

 

In its 2007 Form 10-K and Form 10-Q for the quarter ended March 31, 2008, Abbott reported that it had filed lawsuits against several companies seeking injunctive relief in connection with their proposed generic versions of extended release Depakote®. In the second quarter, Abbott entered into confidential settlement agreements resolving each of these cases, except for the cases filed against Banner Pharmacaps Inc. and Sun Pharmaceutical Industries Ltd.  The remaining cases are not material to Abbott.

 

18



 

In June 2008, Abbott received a subpoena from the United States Department of Justice, through the United States Attorney for the District of Massachusetts.  The government is investigating the sales and marketing activities of Abbott’s biliary stent products.  The government is seeking to determine whether any of these activities violated civil and/or criminal laws, including the Federal False Claims Act, the Food and Drug Cosmetic Act and the Anti-Kickback Statute in connection with Medicare and/or Medicaid reimbursement paid to third parties.

 

While it is not feasible to predict with certainty the outcome of the pending claims, proceedings and investigations in which Abbott is involved, including those previously disclosed, management is of the opinion that their ultimate dispositions should not have a material adverse effect on Abbott’s financial position, cash flows, or results of operations, except for the case filed in April 2007 referred to in the second paragraph of Note 6 to Abbott’s financial statements above and the cases described in the third paragraph of such note.

 

19



 

Item 1ARisk Factors

 

There have been no material changes in our risk factors from those disclosed in Abbott’s 2007 Form 10-K, except for the following:

 

The manufacture of many of Abbott’s products is a highly exacting and complex process, and if Abbott or one of its suppliers encounters problems manufacturing products, Abbott’s business could suffer.

 

The manufacture of many of Abbott’s products is a highly exacting and complex process, due in part to strict regulatory requirements.  Problems may arise during manufacturing for a variety of reasons, including equipment malfunction, failure to follow specific protocols and procedures, problems with raw materials, natural disasters and environmental factors.  In addition, single suppliers are currently used for certain products and materials.  If problems arise during the production of a batch of product, that batch of product may have to be discarded. This could, among other things, lead to increased costs, lost revenue, damage to customer relations, time and expense spent investigating the cause and, depending on the cause, similar losses with respect to other batches or products. If problems are not discovered before the product is released to the market, recall and product liability costs may also be incurred. To the extent Abbott or one of its suppliers experiences significant manufacturing problems, this could have a material adverse effect on Abbott’s revenues and profitability.

 

Other factors can have a material adverse effect on Abbott’s future profitability and financial condition.

 

Many other factors can affect Abbott’s profitability and its financial condition, including:

 

·                  Differences between the fair value measurement of assets and liabilities and their actual value, particularly for pensions, retiree health care, stock compensation, intangibles and goodwill; and for contingent liabilities such as litigation, the absence of a recorded amount, or an amount recorded at the minimum, compared to the actual amount.

 

·                  Changes in or interpretations of laws and regulations including changes in accounting standards, taxation requirements and environmental laws in domestic or foreign jurisdictions.

 

·                  Changes in the rate of inflation (including the cost of raw materials, commodities and supplies), interest rates, market value of Abbott’s equity investments, and the performance of investments held by Abbott or Abbott’s employee benefit trusts.

 

·                  Changes in business and political conditions, including (i) war, political instability, terrorist attacks in the U.S. and other parts of the world, the threat of future terrorist activity in the U.S. and other parts of the world and related military action, (ii) natural disasters, (iii) the cost and availability of insurance due to any of the foregoing events, (iv) labor disputes, strikes, slow-downs or other forms of labor or union activity, and (v) pressure from third-party interest groups.

 

·                  Changes in Abbott’s business units and investments and changes in the relative and absolute contribution of each to earnings and cash flow resulting from evolving business strategies, changing product mix, changes in tax rates both in the U.S. and abroad and opportunities existing now or in the future.

 

·                  Changes in the buying patterns of a major distributor, retailer, or wholesale customer resulting from buyer purchasing decisions, pricing, seasonality, or other factors, or other problems with licensors, suppliers, distributors and business partners.

 

·                  Difficulties related to Abbott’s information technology systems, any of which could adversely affect business operations, including any significant breakdown, invasion, destruction or interruption of these systems.

 

·                  In connection with Abbott’s acquisition of the vascular intervention and endovascular solutions businesses of Guidant Corporation, Abbott loaned BSC International Holding, Limited (a wholly-owned subsidiary of Boston Scientific) $900 million on a subordinated basis. As long as the loan is outstanding, Abbott will be a creditor of Boston Scientific with respect to the $900 million loan and, as such, is subject to credit risk.

 

·                  Legal difficulties, any of which could preclude or delay commercialization of products or adversely affect profitability, including claims asserting statutory or regulatory violations, adverse litigation decisions, and issues regarding compliance with any governmental consent decree or corporate integrity agreement.

 

20



 

Item 2.             Unregistered Sales of Equity Securities and Use of Proceeds

 

(c)                        Issuer Purchases of Equity Securities

 

Period

 

(a) Total
Number of
Shares (or
Units)
Purchased

 

(b) Average
Price Paid per
Share (or Unit)

 

(c) Total Number
of Shares (or
Units) Purchased
as Part of
Publicly
Announced Plans
or Programs

 

(d) Maximum
Number (or
Approximate
Dollar Value) of
Shares (or Units)
that May Yet Be
Purchased
Under the Plans
or Programs

 

April 1, 2008 – April 30, 2008

 

5,026,816

(1)

$

50.620

 

4,942,800

 

$

430,351,656

(2)

May 1, 2008 – May 31, 2008

 

342,062

(1)

$

54.486

 

0

 

$

0

(2)

June 1, 2008 – June 30, 2008

 

189,534

(1)

$

54.199

 

0

 

$

0

(2)

Total

 

5,558,412

(1)

$

50.980

 

4,942,800

 

$

430,351,656

(2)

 

1.                       These shares include:

 

 

(i)

 

the shares deemed surrendered to Abbott to pay the exercise price in connection with the exercise of employee stock options 70,016 in April, 328,062 in May, and 175,534 in June; and

 

 

 

 

 

(ii)

 

the shares purchased on the open market for the benefit of participants in the Abbott Canada Stock Retirement Plan 14,000 in April, 14,000 in May, and 14,000 in June.

 

These shares do not include the shares surrendered to Abbott to satisfy tax withholding obligations in connection with the vesting of restricted stock or restricted stock units.

 

2.                       On October 18, 2006, Abbott announced that its board of directors approved the purchase of up to $2.5 billion of its common shares.

 

21



 

Item 4.                             Submission of Matters to a Vote of Security Holders

 

Abbott Laboratories held its Annual Meeting of Shareholders on April 25, 2008.  The following is a summary of the matters voted on at that meeting.

 

(a)          The shareholders elected Abbott’s entire Board of Directors.  The persons elected to Abbott’s Board of Directors and the number of shares cast for and the number of shares withheld, with respect to each of these persons, were as follows:
 

Name

 

Votes For

 

Votes Withheld

 

 

 

 

 

 

 

Roxanne S. Austin

 

1,339,585,799

 

22,401,501

 

William M. Daley

 

1,336,548,642

 

25,438,658

 

W. James Farrell

 

1,333,126,336

 

28,860,964

 

H. Laurance Fuller

 

1,328,698,246

 

33,289,054

 

William A. Osborn

 

1,327,779,120

 

34,208,180

 

The Rt. Hon. Lord Owen CH

 

1,330,196,285

 

31,791,015

 

Boone Powell Jr.

 

1,328,263,922

 

33,723,378

 

W. Ann Reynolds, Ph.D.

 

1,324,076,547

 

37,910,753

 

Roy S. Roberts

 

1,338,960,890

 

23,026,410

 

Samuel C. Scott III

 

1,275,653,145

 

86,334,155

 

William D. Smithburg

 

1,264,060,988

 

97,926,312

 

Glenn F. Tilton

 

1,335,624,305

 

26,362,995

 

Miles D. White

 

1,329,172,835

 

32,814,465

 

 

(b)         The shareholders ratified the appointment of Deloitte & Touche LLP as Abbott’s auditors.  The number of shares cast in favor of the ratification of Deloitte & Touche LLP, the number against, and the number abstaining were as follows:

 

For

 

Against

 

Abstain

 

1,346,517,731

 

3,480,415

 

11,989,154

 

 

(c)          The shareholders rejected a shareholder proposal on access to medicines.  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

 

43,283,767

 

979,028,778

 

177,639,726

 

162,035,029

 

 

(d)         The shareholders rejected a shareholder proposal on advisory vote. 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

 

429,308,494

 

729,675,093

 

40,969,494

 

162,034,219

 

 

22



 

Item 6.             Exhibits

 

Incorporated by reference to the Exhibit Index included herewith.

 

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

 

 

 

 

 

 

 

 

By:

/s/ Thomas C. Freyman

 

 

 

Thomas C. Freyman,

 

 

 

Executive Vice President,

 

 

 

Finance and Chief Financial Officer

 

 

 

 

 

 

Date:

July 25, 2008

 

 

 

23



 

EXHIBIT INDEX

 

Exhibit No.

 

Exhibit

 

 

 

 

12

 

Statement re: computation of ratio of earnings to fixed charges.

 

 

 

31.1

 

Certification of Chief Executive Officer Required by Rule 13a-14(a) (17 CFR 240.13a-14(a)).

 

 

 

31.2

 

Certification of Chief Financial Officer Required by Rule 13a-14(a) (17 CFR 240.13a-14(a)).

 

 

 

Exhibits 32.1 and 32.2 are furnished herewith and should not be deemed to be “filed” under the Securities Exchange Act of 1934.

 

 

 

32.1

 

Certification of Chief Executive Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

 

 

 

32.2

 

Certification of Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

 

24


Exhibit 12

 

Abbott Laboratories

 

Computation of Ratio of Earnings to Fixed Charges

 

(Unaudited)

 

(dollars in millions)

 

 

 

Six Months Ended

 

 

 

June 30, 2008

 

Net Earnings

 

$

2,260

 

Add (deduct):

 

 

 

Taxes on earnings

 

537

 

Capitalized interest cost, net of amortization

 

(7

)

Minority interest

 

4

 

 

 

 

 

Earnings from Operations as adjusted

 

2,794

 

 

 

 

 

Fixed Charges:

 

 

 

Interest on long-term and short-term debt

 

280

 

Capitalized interest cost

 

16

 

Rental expense representative of an interest factor

 

39

 

 

 

 

 

Total Fixed Charges

 

335

 

 

 

 

 

Total adjusted earnings available for payment of fixed charges

 

$

3,129

 

 

 

 

 

Ratio of earnings to fixed charges

 

9.3

 

 

NOTE:  For the purpose of calculating this ratio, (i) earnings have been calculated by adjusting earnings for taxes on earnings; interest expense; capitalized interest cost, net of amortization; minority interest; and the portion of rentals representative of the interest factor, (ii) Abbott considers one-third of rental expense to be the amount representing return on capital, and (iii) fixed charges comprise total interest expense, including capitalized interest and such portion of rentals.

 


Exhibit 31.1

 

Certification of Chief Executive Officer

Required by Rule 13a-14(a) (17 CFR 240.13a-14(a))

 

I, Miles D. White, certify that:

 

1.             I have reviewed this quarterly report on Form 10-Q of Abbott Laboratories;

 

2.             Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

 

3.             Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of Abbott as of, and for, the periods presented in this report;

 

4.             Abbott’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for Abbott and have:

 

a)     Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to Abbott, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

 

b)    Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

 

c)     Evaluated the effectiveness of Abbott’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

 

d)    Disclosed in this report any change in Abbott’s internal control over financial reporting that occurred during Abbott’s most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, Abbott’s internal control over financial reporting; and

 



 

5.             Abbott’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to Abbott’s auditors and the audit committee of Abbott’s board of directors:

 

a)     All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect Abbott’s ability to record, process, summarize and report financial information; and

 

b)    Any fraud, whether or not material, that involves management or other employees who have a significant role in Abbott’s internal control over financial reporting.

 

 

Date:  July 25, 2008

/s/ Miles D. White

 

Miles D. White, Chairman of the Board

 

and Chief Executive Officer

 

2


Exhibit 31.2