Note 13-Subsequent Event-Issuance of Long-term Debt
On July 5, 2001, Abbott issued $3.250 billion of long-term debt securities.
Proceeds from this issuance were used to reduce short-term commercial paper
borrowings outstanding as of June 30, 2001. Accordingly, $3.250 billion of
commercial paper borrowings have been classified as long-term liabilities in the
accompanying Condensed Consolidated Balance Sheet.
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FINANCIAL REVIEW
Results of Operations-Second Quarter and First Six Months 2001 Compared with
Same Periods in 2000
The following table details sales by reportable segment for the second
quarter and first six months 2001:
(dollars in millions)
Net Sales to Percentage Net Sales to Percentage
External Customers Change(a) External Customers Change(a)
Three Months Ended June 30 Six Months Ended June 30
2001 2000 2001 2000
Pharmaceutical $ 895 $ 563 58.7 $ 1,610 $ 1,170 37.5
Diagnostics 722 754 (4.3 ) 1,426 1,458 (2.2 )
Hospital 686 659 4.2 1,321 1,229 7.5
Ross 511 503 1.5 1,101 1,057 4.1
International 1,187 807 47.1 2,030 1,659 22.3
Total Reportable Segments 4,001 3,286 21.7 7,488 6,573 13.9
Other 98 84 171 150
Net Sales $ 4,099 $ 3,370 21.6 $ 7,659 $ 6,723 13.9
Total U.S. $ 2,451 $ 2,076 18.1 $ 4,744 $ 4,137 14.7
Total International $ 1,648 $ 1,294 27.3 $ 2,915 $ 2,586 12.7
º (a)
º Percentage changes are based on unrounded numbers.
Worldwide sales for the second quarter and first six months reflect
primarily unit growth. Excluding the negative effect of the relatively stronger
U.S. dollar, sales increased 24.4 percent for the second quarter and
16.7 percent for the first six months, respectively, over the comparable 2000
periods. Pharmaceutical and International segment sales were favorably impacted
by the acquisition of the pharmaceutical business of BASF on March 2, 2001.
Diluted earnings per common share for the quarter were 34 cents, compared to
diluted earnings per share of 44 cents a year ago.
Gross profit margin (sales less cost of products sold, including freight and
distribution expenses) was 51.6 percent for the second quarter 2001, compared to
54.6 percent for the second quarter 2000. First six months 2001 gross profit
margin was 52.7 percent, compared to 55.0 percent for the first six months 2000.
These decreases were due primarily to increased goodwill and intangibles
amortization as a result of the acquisition of the pharmaceutical business of
BASF in 2001, the negative effect of the relatively stronger U.S. dollar and
one-time restructuring charges; partially offset by favorable sales mix.
Research and development expenses for the second quarter 2001 and first six
months 2001, excluding acquired in-process research and development of
$172 million and $1.187 billion respectively, increased 9.9 percent and
4.8 percent, respectively, over the comparable 2000 periods. The majority of
research and development expenditures continues to be concentrated on
pharmaceutical and diagnostic products.
Selling, general and administrative expenses for the second quarter 2001 and
first six months 2001 increased 30.1 percent and 16.2 percent, respectively,
over the comparable 2000 periods, due primarily
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to increased spending as a result of the acquisition of the pharmaceutical
business of BASF and increased selling and marketing support for new and
existing products.
As a result of the consent decree entered into with the U.S. government in
1999, as discussed in Note 6, Abbott is prohibited from manufacturing or
distributing certain diagnostic products until Abbott ensures the processes in
its Lake County, Ill., diagnostics manufacturing operations conform with the
U.S. Food and Drug Administration's (FDA) Quality System Regulation (QSR).
Abbott estimates that full year 2000 sales were negatively impacted by
approximately $250 million, and earnings per share were negatively impacted by
approximately 10 cents per share. Under the terms of the amended consent decree,
Abbott must ensure its diagnostics manufacturing operations are in conformance
with the QSR by various dates through January 15, 2001. The FDA will determine
Abbott's conformance with the QSR after an inspection of Abbott's facilities. If
the FDA concludes that the operations are not in conformance with the QSR as of
the date required, Abbott may be subject to additional costs.
The FDA announced in 1997 that every manufacturer of levothyroxine drug
products (SYNTHROID), most of which had been on the market for many years, would
be required as part of the agency's regulatory process to file either an New
Drug Application (NDA), or a citizen petition showing that their products are
not new drugs and therefore do not require an NDA. SYNTHROID's manufacturer at
the time, Knoll Pharmaceutical Company, which Abbott acquired in March 2001,
exercised the citizen petition option because of SYNTHROID's long history and
excellent track record. On April 26, 2001, the FDA denied Knoll's petition.
Abbott promptly responded to the FDA that Abbott would submit an NDA for
SYNTHROID, which Abbott submitted on August 1, 2001. On July 11, 2001 the FDA
issued guidance on the distribution of levothyroxine sodium products during the
NDA review process. The guidance assures that SYNTHROID will remain on the
market while the agency reviews the NDA Abbott has submitted for SYNTHROID.
However, the guidance also requires that levothyroxine sodium products without
approved NDAs will be subject to a phased reduction in distribution as measured
against levels previously distributed. By August 14, 2003, all levothyroxine
sodium products without approved NDAs would be required to cease distribution.
Upon NDA approval, the limits on distribution will be removed. Abbott expects
that the NDA review process will take approximately ten to twelve months, during
which time the distribution of SYNTHROID would be reduced to 60% of the level
distributed during the six months preceding August 1, 2001. During the three
months ended June 30, 2001, Abbott recorded U.S. net sales of SYNTHROID of
$161 million.
Acquisition of Knoll
On March 2, 2001, Abbott acquired, for cash, the pharmaceutical business of
BASF, which includes the global operations of Knoll Pharmaceuticals for
approximately $7.0 billion (subject to adjustments for the change in net assets
of the business as of the closing date compared to net assets as of
September 30, 2000). This acquisition was financed primarily with short-term
borrowings, $3.250 billion of which was subsequently refinanced with long-term
debt. The acquisition is accounted for under the
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purchase method of accounting. The allocation of the acquisition cost is as
follows (in billions of dollars):
Allocation of Acquisition Cost-
Acquired intangible assets, primarily product rights for currently
marketed products $ 3.530
Goodwill 1.778
Acquired in-process research and development 1.187
Acquired net tangible assets .551
Total allocation of acquisition cost $ 7.046
The acquisition cost has been allocated to intangible assets, goodwill,
acquired in-process research and development and net tangible assets based on an
independent appraisal of fair values at the date of acquisition. Product rights
for currently marketed products will be amortized on a straight-line basis over
10 to 16 years (average approximately 13 years) and goodwill will be amortized
in 2001 on a straight-line basis over 20 years. Acquired in-process research and
development of $1.187 billion was charged to income in the first half 2001. The
net tangible assets acquired consist primarily of property and equipment of
approximately $606 million, trade accounts receivable of approximately
$402 million and inventories of approximately $323 million, net of assumed
liabilities, primarily trade accounts payable and other liabilities.
Prior to the date of acquisition, Abbott began to plan for the integration
and restructuring of the business. In the second quarter 2001, Abbott formally
approved several restructuring plans and is continuing to assess and formulate
further restructuring plans for specific business activities. The costs of
implementing formally approved plans have been included in the reported amount
of goodwill above. Abbott expects that additional restructuring plans will be
finalized and formally approved throughout the 12 months following the date of
acquisition which will increase the amount of reported goodwill above. In
addition, integration of the acquired operations will result in charges which
will be recorded against earnings in the periods in which the integration plans
are finalized, consistent with previous forecasts.
Pro Forma Financial Information
The following unaudited pro forma financial information reflects the
consolidated results of operations of Abbott as if the acquisition of the
pharmaceutical business of BASF had taken place on January 1, 2000. The pro
forma information includes primarily adjustments for acquired in-process
research and development, amortization of product rights for currently marketed
products, interest expense for estimated acquisition debt and amortization of
goodwill. The pro forma financial
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information is not necessarily indicative of the results of operations as they
would have been had the transaction been effected on the assumed date.
Three months ended Six months ended
June 30 June 30
2001 2000 2001 2000
In millions, except per share amounts Pro Forma Pro Forma Pro Forma Pro Forma
Sales $ 4,099.1 $ 3,892.5 $ 8,116.1 $ 7,736.2
Net income 664.4 578.8 1,018.0 1,160.8
Diluted earnings per share 0.43 0.37 0.66 0.74
Restructuring Charges
(dollars in millions)
In the second quarter 2001 Abbott began implementing restructuring plans
related to the operations of the acquired pharmaceutical business of BASF. In
addition, Abbott announced in the second quarter 2001 that it was closing one of
its manufacturing operations and relocating production to other Abbott
facilities. The following summarizes the initial restructuring charges and
subsequent activity:
Employee Asset
(dollars in millions) Related Impairments Total
Restructuring charges $ 77.0 $ 11.5 $ 88.5
Second quarter activity (20.3 ) (11.5 ) (31.8 )
Accrued balance at June 30, 2001 $ 56.7 $ - $ 56.7
Of the $88.5 total restructuring charges, $42.3 has been recorded as
goodwill associated with the acquisition of the pharmaceutical business of BASF.
Of the amount expensed, approximately $35.8 is classified as cost of products
sold, $8.0 as selling, general and administrative and $2.4 as research and
development. Employee related costs are primarily severance pay, relocation of
former BASF employees and outplacement services.
Sale of Agricultural Products Business
On January 20, 2000, Abbott sold its agricultural products business to
Sumitomo Chemical Co., Ltd., resulting in a $46 million gain recorded in the
first quarter 2000. In the second quarter 2000, upon Sumitomo achieving a sales
milestone, Abbott recorded an additional $92 million gain. Under the
transaction, Sumitomo acquired research and development, sales, marketing, and
support operations for Abbott's entire line of naturally occurring
biopesticides, plant growth regulators and other products for agriculture,
public health and forestry. Bulk active ingredient manufacturing rights were
retained by Abbott.
Interest (Income) Expense, Net
Net interest expense increased in both the second quarter and first six
months 2001 due primarily to a higher level of borrowings as a result of the
acquisition of the pharmaceutical business of BASF.
Loss (Income) from TAP Pharmaceutical Products Inc. Joint Venture
Abbott's income from TAP Pharmaceutical Products Inc. (TAP) joint venture
was adversely affected, for the six months ended June 30, 2001, as a result of
an increase in a litigation reserve
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related to the U.S. Department of Justice investigation of TAP's marketing and
sales practices relating to LUPRON as discussed in Note 5 to the condensed
consolidated financial statements.
Taxes on Earnings
The effective tax rates on earnings for the six months and second quarter
2001, excluding the charge for acquired in-process research and development,
were approximately 29 percent and 24 percent, respectively. The estimated annual
effective tax rate on income, excluding the charge for acquired in-process
research and development is approximately 26 percent. In addition, the tax rate
used to benefit the charge for acquired in-process research and development was
38 percent, which is comprised of the U.S. federal income tax rate plus state
income taxes, net of the federal tax effect. The combination of these items
resulted in tax rates of (11.4) percent for the six months ended 2001 and
20.2 percent for the second quarter 2001. The effective income tax rate was
27 percent in 2000.
Liquidity and Capital Resources at June 30, 2001 Compared with December 31, 2000
Net cash from operating activities for the first six months 2001 totaled
$1.5 billion. Abbott expects annual cash flow from operating activities to
continue to approximate or exceed Abbott's capital expenditures and cash
dividends.
At June 30, 2001, Abbott had working capital of $555 million compared to
working capital of approximately $3.1 billion at December 31, 2000. The decrease
in working capital in 2001 was primarily due to increased short-term commercial
paper borrowings as a result of the acquisition of the pharmaceutical business
of BASF.
At June 30, 2001, Abbott's bond ratings were AA by Standard & Poor's
Corporation and Aa3 by Moody's Investors Service. Abbott has readily available
financial resources, including unused domestic lines of credit of $3.0 billion,
which support domestic commercial paper borrowing arrangements. As a result of
the acquisition of the pharmaceutical business of BASF, Abbott's credit ratings
were adjusted to reflect the increased borrowings that financed the acquisition.
Under a registration statement filed with the Securities and Exchange
Commission in February 2001, Abbott issued $3.250 billion of long-term debt
securities on July 5, 2001. Proceeds from this issuance were used to reduce
short-term commercial paper borrowings outstanding as of June 30, 2001.
Accordingly, $3.250 billion of commercial paper borrowings have been classified
as long-term liabilities in the accompanying Condensed Consolidated Balance.
Under the registration statement, Abbott may issue up to $250 million of
securities in the future in the form of debt securities or common shares without
par value.
Legislative Issues
Abbott's primary markets are highly competitive and subject to substantial
government regulation. Abbott 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. Abbott 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 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, in the
Annual Report on Form 10-K, which is available upon request.
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Recently Issued Accounting Standards
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative Instruments
and Hedging Activities." This statement requires the recognition of the fair
value of derivatives as either assets or liabilities. Adoption of the provisions
of this statement on January 1, 2001, resulted in a transition credit to income
of approximately $2 million in 2001.
In June 2001, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards (SFAS) No. 141, "Business Combinations" and SFAS
No. 142, "Goodwill and Other Intangible Assets." SFAS No. 141 requires that all
business combinations initiated after June 30, 2001, be accounted for using the
purchase method of accounting. With the adoption of SFAS No. 142 on January 1,
2002, goodwill will no longer be subject to amortization over its estimated
useful life. Goodwill will be subject to at least an annual assessment of
impairment by applying a fair-value-based test, beginning on the date of
adoption of the new standard. Abbott is assessing the potential impact, if any,
which may be caused by the assessment of impairment requirements of SFAS
No. 142. Abbott estimates that annual goodwill amortization subject to the new
rule is approximately $80 million to $100 million on an after tax basis.
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 Exhibit 99.1
to the Annual Report on Form 10-K.
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