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 September 30, 1996
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
---------------- -----------------
Commission File No. 1-2189
ABBOTT LABORATORIES
An Illinois Corporation I.R.S. Employer Identification
No. 36-0698440
100 Abbott Park Road
Abbott Park, Illinois 60064-3500
Telephone: (847) 937-6100
Indicate by check mark whether the registrant (l) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes X . No .
--- ---
As of October 31, 1996, the Corporation had 776,845,109 common shares
without par value outstanding.
PART 1 FINANCIAL INFORMATION
ABBOTT LABORATORIES AND SUBSIDIARIES
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
ABBOTT LABORATORIES AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF EARNINGS
(UNAUDITED)
(Dollars in thousands except per share data)
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30 SEPTEMBER 30
------------------------- -------------------------
1996 1995 1996 1995
---------- ---------- ---------- ----------
Net Sales . . . . . . . . . . . . . . . $2,646,194 $2,390,753 $8,017,611 $7,415,460
---------- ---------- ---------- ----------
Cost of products sold . . . . . . . . . 1,177,247 1,070,253 3,477,411 3,245,187
Research and development . . . . . . . . 278,970 255,829 852,432 790,364
Selling, general and administrative. . . 615,269 521,754 1,786,481 1,652,863
---------- ---------- ---------- ----------
Total Operating Cost and Expenses. . . 2,071,486 1,847,836 6,116,324 5,688,414
---------- ---------- ---------- ----------
Operating Earnings . . . . . . . . . . . 574,708 542,917 1,901,287 1,727,046
---------- ---------- ---------- ----------
Interest expense . . . . . . . . . . . . 28,195 18,420 68,030 50,224
Interest income . . . . . . . . . . . . (10,930) (13,173) (31,606) (37,385)
Other (income) expense, net . . . . . . (39,560) (4,246) (80,412) (21,020)
---------- ---------- ---------- ----------
Earnings Before Taxes . . . . . . . . . 597,003 541,916 1,945,275 1,735,227
Taxes on Earnings . . . . . . . . . . . 176,116 159,865 573,856 511,892
---------- ---------- ---------- ----------
Net Earnings . . . . . . . . . . . . . . $ 420,887 $ 382,051 $1,371,419 $1,223,335
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
Net Earnings Per Common Share . . . . . $.54 $.48 $1.75 $1.53
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
Cash Dividends Declared
Per Common Share . . . . . . . . . . . $.24 $.21 $.72 $.63
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
The accompanying notes to condensed consolidated financial statements are an
integral part of this statement.
2
ABBOTT LABORATORIES AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEET
(Dollars in Thousands)
SEPTEMBER 30 DECEMBER 31
1996 1995
------------ -----------
(unaudited)
ASSETS
Current Assets:
Cash and cash equivalents. . . . . . . . . . . . . . . . . . . . . . . . . . $ 139,896 $ 281,197
Investment securities. . . . . . . . . . . . . . . . . . . . . . . . . . . . 39,274 34,500
Trade Receivables, less allowances of $150,415 in 1996
and $157,990 in 1995. . . . . . . . . . . . . . . . . . . . . . . . . . . 1,549,738 1,563,038
Inventories:
Finished products . . . . . . . . . . . . . . . . . . . . . . . . . . . . 622,361 560,637
Work in process . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 261,144 238,943
Materials . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 341,200 311,361
----------- -----------
Total Inventories. . . . . . . . . . . . . . . . . . . . . . . . . . . 1,224,705 1,110,941
Prepaid income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . 649,218 651,436
Other prepaid expenses and receivables . . . . . . . . . . . . . . . . . . . 671,020 585,599
----------- -----------
Total Current Assets . . . . . . . . . . . . . . . . . . . . . . . . . 4,273,851 4,226,711
----------- -----------
Investment Securities Maturing after One Year. . . . . . . . . . . . . . . . . . 529,588 422,547
----------- -----------
Property and Equipment, at Cost. . . . . . . . . . . . . . . . . . . . . . . . . 8,242,116 7,762,442
Less: accumulated depreciation and amortization. . . . . . . . . . . . . . . 3,839,638 3,512,904
----------- -----------
Net Property and Equipment . . . . . . . . . . . . . . . . . . . . . . 4,402,478 4,249,538
Deferred Charges, Intangible and Other Assets. . . . . . . . . . . . . . . . . . 1,463,425 513,784
----------- -----------
$10,669,342 $ 9,412,580
----------- -----------
----------- -----------
LIABILITIES AND SHAREHOLDERS' INVESTMENT
Current Liabilities:
Short-term borrowings and current portion of long-term debt. . . . . . . . . $ 1,451,543 $ 1,049,863
Trade accounts payable . . . . . . . . . . . . . . . . . . . . . . . . . . . 788,092 755,921
Salaries, income taxes, dividends payable, and other accruals. . . . . . . . 2,048,253 1,984,530
----------- -----------
Total Current Liabilities . . . . . . . . . . . . . . . . . . . . . . . 4,287,888 3,790,314
----------- -----------
Long-Term Debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 682,166 435,198
----------- -----------
Other Liabilities and Deferrals:
Deferred Income Taxes. . . . . . . . . . . . . . . . . . . . . . . . . . . . 174,368 67,993
Other. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 810,950 722,228
----------- -----------
Total Other Liabilities and Deferrals . . . . . . . . . . . . . . . . . 985,318 790,221
----------- -----------
Shareholders' Investment:
Preferred shares, $1 par value
Authorized - 1,000,000 shares, none issued - -
Common shares, without par value
Authorized - 1,200,000,000 shares
Issued at stated capital amount -
1996: 787,366,358 shares; 1995: 797,021,211 shares. . . . . . . . . . . 659,274 581,562
Earnings employed in the business. . . . . . . . . . . . . . . . . . . . . . . . 4,174,554 3,926,917
Cumulative translation adjustments . . . . . . . . . . . . . . . . . . . . . . . (63,662) (55,646)
----------- -----------
4,770,166 4,452,833
Less:
Common shares held in treasury, at cost -
1996: 9,660,632 shares; 1995: 9,714,379 shares . . . . . . . . . . . . . . . 50,985 51,268
Unearned compensation - restricted stock awards. . . . . . . . . . . . . . . . . 5,211 4,718
----------- -----------
Total Shareholders' Investment. . . . . . . . . . . . . . . . . . . . . 4,713,970 4,396,847
----------- -----------
$10,669,342 $ 9,412,580
----------- -----------
----------- -----------
The accompanying notes to condensed consolidated financial statements are an
integral part of this statement.
3
ABBOTT LABORATORIES AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(UNAUDITED)
(Dollars in thousands)
NINE MONTHS ENDED SEPTEMBER 30
------------------------------
1996 1995
---------- ----------
Cash Flow From (Used in) Operating Activities:
Net earnings. . . . . . . . . . . . . . . . . . . . . $1,371,419 $1,223,335
Adjustments to reconcile net earnings to
net cash from operating activities -
Depreciation and amortization . . . . . . . . . . . . 508,059 399,494
Trade receivables . . . . . . . . . . . . . . . . . . 18,495 5,039
Inventories . . . . . . . . . . . . . . . . . . . . . (105,848) (30,789)
Other, net. . . . . . . . . . . . . . . . . . . . . . 19,419 (42,680)
---------- ----------
Net Cash From Operating Activities . . . . . . . 1,811,544 1,554,399
---------- ----------
Cash Flow From (Used in) Investing Activities:
Acquisitions of property and equipment. . . . . . . . (681,573) (698,881)
Acquisition of MediSense, net of cash acquired. . . . (815,290) -
Investment securities transactions. . . . . . . . . . (85,186) (160,778)
Other . . . . . . . . . . . . . . . . . . . . . . . . 19,118 17,239
---------- ----------
Net Cash (Used in) Investing Activities. . . . . (1,562,931) (842,420)
---------- ----------
Cash Flow From (Used in) Financing Activities:
Borrowing transactions. . . . . . . . . . . . . . . . 649,052 299,834
Common share transactions . . . . . . . . . . . . . . (493,058) (490,873)
Dividends paid. . . . . . . . . . . . . . . . . . . . (541,439) (487,309)
---------- ----------
Net Cash (Used in) Financing Activities. . . . . (385,445) (678,348)
---------- ----------
Effect of exchange rate changes on cash and
cash equivalents. . . . . . . . . . . . . . . . . . . (4,469) (3,104)
---------- ----------
Net Increase (Decrease) in Cash and Cash Equivalents. . . (141,301) 30,527
Cash and Cash Equivalents, Beginning of Year. . . . . . . 281,197 290,272
---------- ----------
Cash and Cash Equivalents, End of Period. . . . . . . . . $ 139,896 $ 320,799
---------- ----------
---------- ----------
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
SEPTEMBER 30, 1996
(UNAUDITED)
NOTE 1 - BASIS OF PREPARATION:
The accompanying unaudited, condensed consolidated financial statements have
been prepared pursuant to rules and regulations of the Securities and Exchange
Commission and, therefore, do not include all information and footnote
disclosures normally included in audited financial statements. However, in the
opinion of management, all adjustments (which include only normal adjustments)
necessary to present fairly the financial position, cash flows, and results of
operations have been made. It is suggested that these statements be read in
conjunction with the financial statements included in the Company's Annual
Report on Form 10-K for the year ended December 31, 1995.
NOTE 2 - EARNINGS PER COMMON SHARE:
Earnings per common share amounts are computed by using the weighted average
number of common shares outstanding. These shares averaged 782,915,000 for the
nine months ended September 30, 1996 and 797,321,000 for the same period
in 1995.
NOTE 3 - TAXES ON EARNINGS:
Taxes on earnings reflect the estimated annual effective tax rates. The
effective tax rates are less than the statutory U.S. Federal income tax rate
principally due to tax incentive grants related to subsidiaries operating in
Puerto Rico, the Dominican Republic, Italy, Ireland, and the Netherlands.
5
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1996
(Unaudited), Continued
NOTE 4 - LITIGATION AND ENVIRONMENTAL MATTERS:
The Company is involved in various claims and legal proceedings including
numerous antitrust suits and investigations in connection with the sale and
marketing of infant formula products and the pricing of prescription
pharmaceuticals.
In addition, the Company has been identified as a potentially responsible party
for investigation and cleanup costs at a number of locations in the United
States and Puerto Rico under Federal remediation laws and is voluntarily
investigating potential contamination at a number of Company-owned locations.
The matters above are discussed more fully in Item 1, Business - Environmental
Matters, and Item 3, Legal Proceedings, in the Annual Report on Form 10-K, which
is available upon request, and in Part II, Item 1, Legal Proceedings, in this
Form.
The Company expects that within the next year, progress in the legal proceedings
described above may cause a change in the estimated reserves recorded by the
Company. While it is not feasible to predict the outcome of such pending
claims, proceedings, investigations and remediation activities with certainty,
management is of the opinion that their ultimate disposition should not have a
material adverse effect on the Company's financial position, cash flows, or
results of operations.
NOTE 5 - ACQUISITION OF MEDISENSE:
In the second and third quarters 1996, the Company acquired, for cash, all of
the outstanding shares of MediSense, Inc. (MediSense), a manufacturer of blood
glucose self-testing systems. A substantial portion of the purchase price was
allocated to intangible assets, including goodwill, which will be amortized on a
straight-line basis over up to 40 years. In addition, $37 million was charged
against earnings for acquired in-process research and development. Had this
acquisition occurred on January 1, 1995, consolidated sales and net income would
not have been significantly different from reported amounts.
6
FINANCIAL REVIEW
RESULTS OF OPERATIONS - THIRD QUARTER AND FIRST NINE MONTHS 1996 COMPARED WITH
SAME PERIODS IN 1995
Worldwide sales for the third quarter and first nine months increased
10.7 percent and 8.1 percent, respectively, over the comparable 1995 periods.
Net earnings increased 10.2 percent and 12.1 percent, respectively, in the third
quarter and first nine months 1996. Earnings per share increased 12.5 percent
and 14.4 percent, respectively, over the prior year periods.
Gross profit margin (sales less cost of products sold, including freight and
distribution expenses) was 55.5 percent for the 1996 third quarter, compared to
55.2 percent for the 1995 third quarter. First nine months gross profit margin
was 56.6 percent, compared to 56.2 percent a year earlier. These increases are
due primarily to favorable product mix, especially higher sales of
pharmaceuticals, and productivity improvements; partially offset by higher
project expenses for new products and the effects of inflation.
Research and development expenses were $279.0 million for the third quarter 1996
and $852.4 million for the nine months 1996, including $37 million of acquired
in-process research and development related to the purchase of MediSense. The
nine month 1995 results included a similar charge for the acquisition of certain
technologies. Research and development represented 10.5 percent and 10.6
percent of net sales in the third quarter and first nine months 1996, compared
to 10.7 percent for both periods in 1995. The majority of research and
development expenditures continues to be concentrated on pharmaceutical and
diagnostic products.
Selling, general and administrative expenses for the third quarter and first
nine months 1996 increased 17.9 percent and 8.1 percent, respectively, over the
comparable prior year periods, net of the favorable effect of the relatively
stronger U.S. dollar of 2.8 percent and 1.7 percent, respectively. The net
increases reflect additional selling and marketing support for new and existing
products, primarily for pharmaceutical and nutritional products, partially
offset for the nine months 1996 by lower litigation expenses and the absence of
contributions to the Company's charitable foundation in 1996.
Other (income) expense, net, includes net foreign exchange losses of
$4.5 million and $17.7 million, respectively, for the third quarter and first
nine months 1996 compared with net foreign exchange losses of $3.5 million and
$19.0 million for the corresponding prior year periods. Other (income) expense,
net, also includes the Company's share of the income from joint ventures,
primarily TAP Holdings Inc., and minority interest expense.
7
FINANCIAL REVIEW
(continued)
INDUSTRY SEGMENTS
Industry segment sales for the third quarter and first nine months 1996 and the
related change from the comparable 1995 periods are shown in the table below.
The Pharmaceutical and Nutritional Products segment includes a broad line of
adult and pediatric pharmaceuticals and nutritionals, which are sold primarily
on the prescription or recommendation of physicians or other health care
professionals; consumer products; agricultural and chemical products; and bulk
pharmaceuticals. The Hospital and Laboratory Products segment includes
diagnostic systems for consumers and for 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 third quarter and first nine months
1996 primarily reflect unit growth. International sales were unfavorably
affected 6.5 percent by the relatively stronger dollar in the third quarter. On
a year-to-date basis, international sales were unfavorably affected 4.0 percent
by the relatively stronger U.S. dollar.
Third Quarter Nine Months
- -----------------------------------------------------------------------------------------
SEGMENT SALES 1996 Percent 1996 Percent
(in millions of dollars) Sales Increase Sales Increase
- -----------------------------------------------------------------------------------------
Pharmaceutical and Nutritional Products:
Domestic $ 956.6 13.9 $2,992.4 10.2
- -----------------------------------------------------------------------------------------
International 499.3 7.8 1,594.2 9.4
- -----------------------------------------------------------------------------------------
1,455.9 11.7 4,586.6 9.9
Hospital and Laboratory Products:
Domestic 648.2 12.8 1,843.4 6.0
- -----------------------------------------------------------------------------------------
International 542.1 5.7 1,587.6 5.5
- -----------------------------------------------------------------------------------------
1,190.3 9.4 3,431.0 5.8
Total All Segments:
Domestic 1,604.8 13.4 4,835.8 8.6
- -----------------------------------------------------------------------------------------
International 1,041.4 6.7 3,181.8 7.4
- -----------------------------------------------------------------------------------------
$2,646.2 10.7 $8,017.6 8.1
- -----------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------
8
FINANCIAL REVIEW
(continued)
LIQUIDITY AND CAPITAL RESOURCES AT SEPTEMBER 30, 1996
COMPARED WITH DECEMBER 31, 1995
Net cash from operating activities for the first nine months 1996 totaled
$1.812 billion. The Company expects annual cash flow from operating activities
to continue to approximate or exceed the Company's capital expenditures and cash
dividends. The Company funded the acquisition of MediSense through commercial
paper borrowings.
The Company has maintained its favorable bond ratings (AAA by Standard & Poor's
Corporation and Aa1 by Moody's Investors Service) and continues to have readily
available financial resources, including unused domestic lines of credit of
$1.5 billion at September 30, 1996. These lines of credit back up domestic
commercial paper borrowing arrangements.
During the first nine months 1996, the Company continued its program to purchase
its common shares. The Company purchased and retired 13,155,000 shares during
this period at a cost of $570 million. An additional 20,215,000 shares may be
purchased in future periods under authorization granted by the Board of
Directors in October 1996 and September 1995.
In June 1996, the Company filed a registration statement with the Securities and
Exchange Commission. The Company may issue up to $650 million of debt
securities in the future under this registration statement.
LEGISLATIVE ISSUES
The Company's primary markets are highly competitive and subject to substantial
government regulation. The Company expects debate to continue at both the
federal and the state levels over the availability, method of delivery, and
payment for health care products and services. The Company believes that if
legislation is enacted, it could have the effect of reducing prices, or reducing
the rate of price increases for medical products and services. International
operations are also subject to a significant degree of government regulation.
It is not possible to predict the extent to which the Company or the health care
industry in general might be adversely affected by these factors in the future.
A more complete discussion of these factors is contained in Item 1, Business, in
the Annual Report on Form 10-K, which is available upon request.
9
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company's 10-Q for the fiscal quarter ending March 31, 1996 reported
that on March 15, 1996, the North Carolina Department of Environment,
Health, and Natural Resources ("DEHNR") issued a Notice of Initiation of
Enforcement Action to the Company alleging that during the period between
1987 and 1993 the Company violated certain air quality regulations in North
Carolina. On August 20, 1996, the Company and DEHNR concluded the
Enforcement Action by executing a settlement agreement. Under the settlement
agreement, the Company does not admit liability but does agree to make a
settlement payment of $675,000.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
11. Statement re: computation of per share earnings -- attached
hereto.
12. Statement re: computation of ratio of earnings to
fixed charges -- attached hereto.
27. Financial Data Schedule -- attached hereto.
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the quarter ended
September 30, 1996.
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
Date: November 13, 1996 /s/ Theodore A. Olson
-----------------------------------
Theodore A. Olson, Vice President
and Controller (Principal
Accounting Officer)
EXHIBIT 11
ABBOTT LABORATORIES AND SUBSIDIARIES
CALCULATION OF FULLY DILUTED EARNINGS PER SHARE
(Dollars and Shares in Millions Except Per Share Amounts)
NINE MONTHS ENDED SEPTEMBER 30
------------------------------
1996 1995
--------- ---------
1. Net earnings $ 1,371.4 $ 1,223.3
--------- ---------
2. Average number of shares outstanding 782.9 797.3
--------- ---------
3. Earnings per share based upon average
outstanding shares (1 divided by 2) $ 1.75 $ 1.53
--------- ---------
--------- ---------
4. Fully diluted earnings per share:
a. Stock options granted and outstanding for
which the market price at quarter-end
exceeds the option price 31.5 30.0
--------- ---------
--------- ---------
b. Aggregate proceeds to the Company from
the exercise of options in 4.a. $ 994.0 $ 828.1
--------- ---------
--------- ---------
c. Market price of the Company's common
stock at quarter-end $ 49.250 $ 42.625
--------- ---------
--------- ---------
d. Shares which could be repurchased
under the treasury stock
method (4.b. divided by 4.c.) 20.2 19.4
--------- ---------
--------- ---------
e. Addition to average outstanding shares
(4.a. - 4.d.) 11.3 10.6
--------- ---------
--------- ---------
f. Shares for fully diluted earnings per
share calculation (2. + 4.e.) 794.2 807.9
--------- ---------
--------- ---------
g. Fully diluted earnings per share
(1. divided by 4.f.) $ 1.73 $ 1.51
--------- ---------
--------- ---------
EXHIBIT 12
ABBOTT LABORATORIES
CALCULATION OF RATIO OF EARNINGS TO FIXED CHARGES
(Unaudited)
(Millions of Dollars)
NINE MONTHS ENDED
SEPTEMBER 30, 1996
------------------
Net Earnings $ 1,371
Add:
Income taxes 574
Minority interest 13
--------
Net earnings as adjusted 1,958
--------
Fixed Charges:
Interest on long-term and
short-term debt 68
Capitalized interest cost 9
Rental expense representative
of an interest factor 20
--------
Total Fixed Charges 97
--------
Total adjusted earnings available for
payment of fixed charges $ 2,055
--------
--------
Ratio of earnings to fixed charges 21.2
--------
--------
NOTE: For the purpose of calculating this ratio, (i) earnings have been
calculated by adjusting net 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) the Company 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.
5
1,000
9-MOS
DEC-31-1996
JAN-01-1996
SEP-30-1996
139,896
39,274
1,700,153
150,415
1,224,705
4,273,851
8,242,116
3,839,638
10,669,342
4,287,888
682,166
0
0
659,274
4,054,696
10,669,342
8,017,611
8,017,611
3,477,411
3,477,411
852,432
23,999
68,030
1,945,275
573,856
1,371,419
0
0
0
1,371,419
1.75
1.73
OTHER EXPENSES CONSIST OF RESEARCH AND DEVELOPMENT EXPENSES.
