UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1994
Commission file number 1-6571
SCHERING-PLOUGH CORPORATION
Incorporated in New Jersey 22-1918501
One Giralda Farms (I.R.S. Employer Identification No.)
Madison, N.J. 07940-1000 (201) 822-7000
(telephone number)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months, and (2) has been subject to such
filing requirements for the past 90 days.
YES X NO
Common Shares Outstanding as of March 31, 1994: 193,141,604
PART I. - FINANCIAL INFORMATION
Item 1. Financial Statements
SCHERING-PLOUGH CORPORATION AND SUBSIDIARIES
STATEMENTS OF CONSOLIDATED INCOME
FOR THE THREE MONTHS ENDED MARCH 31
(UNAUDITED)
(Dollars in millions, except per share figures)
1994 1993
Sales. . . . . . . . . . . . . . . . . . . $ 1,161.6 $ 1,089.6
Costs and expenses:
Cost of sales . . . . . . . . . . . . 247.3 234.2
Selling, general
and administrative. . . . . . . . . 443.4 427.8
Research and development. . . . . . . 142.0 132.9
Other, net. . . . . . . . . . . . . . (4.2) 2.6
828.5 797.5
Income before income taxes . . . . . . . . 333.1 292.1
Income taxes. . . . . . . . . . . . . 79.9 68.6
Income before cumulative effect of
accounting change . . . . . . . . . . 253.2 223.5
Cumulative effect of accounting change . . - (94.2)
Net income . . . . . . . . . . . . . . . . $ 253.2 $ 129.3
Earnings per common share before
cumulative effect of accounting
change. . . . . . . . . . . . . . . . $ 1.31 $ 1.13
Cumulative effect of accounting change . . - (.48)
Earnings per common share. . . . . . . . . $ 1.31 $ .65
Dividends per common share . . . . . . . . $ .45 $ .39
See notes to consolidated financial statements.
SCHERING-PLOUGH CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
(Dollars in millions, except per share figures)
March 31, December 31,
1994 1993
Assets
Cash and cash equivalents . . . . . . . . $ 110.6 $ 222.2
Short-term investments. . . . . . . . . . 116.2 207.2
Accounts receivable, net. . . . . . . . . 791.0 687.1
Inventories . . . . . . . . . . . . . . . 428.8 404.6
Prepaid expenses, deferred income
taxes and other current assets . . . . . 389.1 379.4
Total current assets. . . . . . . . . 1,835.7 1,900.5
Property, plant and equipment . . . . . . 2,881.9 2,838.9
Less accumulated depreciation . . . . . . 893.5 871.2
Property, net . . . . . . . . . . . . 1,988.4 1,967.7
Intangible assets, net. . . . . . . . . . 174.8 182.5
Other assets. . . . . . . . . . . . . . . 271.3 266.2
$4,270.2 $4,316.9
Liabilities and Shareholders' Equity
Accounts payable. . . . . . . . . . . . . $ 228.7 $ 249.0
Short-term borrowings and current
portion of long-term debt. . . . . . . . 911.8 1,076.0
Other accrued liabilities . . . . . . . . 787.0 807.4
Total current liabilities . . . . . . 1,927.5 2,132.4
Long-term debt. . . . . . . . . . . . . . 181.5 182.3
Other long-term liabilities . . . . . . . 427.3 420.3
Shareholders' Equity:
Preferred shares - $1 par value
each; issued - none. . . . . . . . . . . - -
Common shares - $1 par value each;
issued - 251,482,691 shares . . . . . . 251.5 251.5
Paid-in capital . . . . . . . . . . . . . 86.0 80.9
Retained earnings . . . . . . . . . . . . 3,601.6 3,435.6
Foreign currency translation
adjustment and other . . . . . . . . . . (103.8) (116.2)
Total . . . . . . . . . . . . . . . . 3,835.3 3,651.8
Less treasury shares, at cost - 1994,
58,341,087 shares; 1993, 57,927,994
shares . . . . . . . . . . . . . . . . . 2,101.4 2,069.9
Total shareholders' equity. . . . . . 1,733.9 1,581.9
$4,270.2 $4,316.9
<FN>
See notes to consolidated financial statements.
PAGE
SCHERING-PLOUGH CORPORATION AND SUBSIDIARIES
STATEMENTS OF CONSOLIDATED CASH FLOWS
FOR THE THREE MONTHS ENDED MARCH 31
(UNAUDITED)
(Dollars in millions)
1994 1993
Operating Activities:
Net income. . . . . . . . . . . . . . . . $ 253.2 $ 129.3
Depreciation and amortization . . . . . . 38.3 33.1
Working capital changes - source (use):
Accounts receivable. . . . . . . . . . . (90.2) (1.1)
Inventories. . . . . . . . . . . . . . . (11.7) (12.2)
Other current assets . . . . . . . . . . 1.5 (26.1)
Accounts payable and other accrued
liabilities . . . . . . . . . . . . . . (47.2) 1.9
Other, net. . . . . . . . . . . . . . . . (1.7) (25.7)
Net cash provided by operating
activities . . . . . . . . . . . . . . . 142.2 99.2
Investing Activities:
Reduction of investments. . . . . . . . . 193.2 1.4
Purchases of investments. . . . . . . . . (104.8) (.8)
Capital expenditures. . . . . . . . . . . (59.2) (84.8)
Other, net. . . . . . . . . . . . . . . . .2 (.9)
Net cash provided by (used for) investing
activities. . 29.4 (85.1)
Financing Activities:
Net change in short-term borrowings . . . (168.2) 108.8
Dividends paid to common shareholders . . (87.1) (77.8)
Common shares repurchased . . . . . . . . (31.1) (275.7)
Proceeds from other equity transactions . 3.4 3.3
Other, net. . . . . . . . . . . . . . . . - (17.9)
Net cash used for financing activities. . (283.0) (259.3)
Effect of Exchange Rates on Cash and
Cash Equivalents. . . . . . . . . . . . . (.2) (.5)
Net Decrease in Cash and
Cash Equivalents. . . . . . . . . . . . . (111.6) (245.7)
Cash and Cash Equivalents, Beginning
of Period . . . . . . . . . . . . . . . . 222.2 406.3
Cash and Cash Equivalents, End of Period . $ 110.6 $ 160.6
<FN>
See notes to consolidated financial statements.
PAGE
SCHERING-PLOUGH CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(Dollars in millions, except per share figures)
Basis of Presentation
The unaudited financial statements included herein have been
prepared pursuant to the rules and regulations of the Securities
and Exchange Commission for reporting on Form 10-Q. Certain
information and footnote disclosures normally included in
financial statements prepared in accordance with generally
accepted accounting principles have been condensed or omitted
pursuant to such rules and regulations. The statements should be
read in conjunction with the accounting policies and notes to
consolidated financial statements included in the Company's 1993
Annual Report on Form 10-K.
In the opinion of management, the financial statements reflect
all adjustments necessary for a fair statement of the operations
for the interim periods presented.
Investment Securities
Effective January 1, 1994, the Company adopted Statement of
Financial Accounting Standards No. 115 (SFAS No. 115),
"Accounting for Certain Investments in Debt and Equity
Securities". SFAS No. 115 requires that all investments subject
to its provisions, except those that will be held to maturity, be
carried at fair value. All of the Company's investment
securities are available for sale, and, accordingly, are carried
at fair value. There was no effect on income as a result of
adopting SFAS No. 115.
The fair value of investment securities subject to the provisions
of SFAS No. 115, excluding cash equivalents, totaled $199.9 at
March 31, 1994. This includes $116.2 in short-term investments
and $79.8 of securities held in trust for employee benefit
purposes. Substantially all investments in debt securities
mature within one year. Unrealized gains and losses at March 31,
1994, and realized gains and losses during the quarter ended
March 31, 1994, based on the specific identification method, were
not material.
Inventories
Inventories consisted of:
March 31, December 31,
1994 1993
Finished products . . . . . . . $ 149.8 $ 168.3
Goods in process. . . . . . . . 96.9 95.5
Raw materials and supplies. . . 182.1 140.8
Total inventories . . . . . . $ 428.8 $ 404.6
Sales
Sales for the three months ended March 31, 1994 and 1993 were as
follows:
1994 1993
Pharmaceutical products . . . . $ 951.7 $ 869.0
Health care products. . . . . . 209.9 220.6
Consolidated sales. . . . . . $1,161.6 $1,089.6
Earnings Per Common Share
Earnings per common share is computed by dividing net income by
the weighted-average number of common shares outstanding. Shares
issuable through the exercise of stock options and warrants and
under deferred delivery agreements are not considered in the
calculation, as they do not have a material effect on the
determination of earnings per common share. The weighted-average
number of shares used in the computation of earnings per common
share for the three months ended March 31, 1994 and 1993 were
193,489,000 and 198,032,000 respectively.
Interest Income and Interest Expense
Interest income for the three months ended March 31, 1994 and
1993 was $3.9 and $5.8, respectively. Interest expense for the
three months ended March 31, 1994 and 1993 was $10.6 and $7.8,
respectively. Interest income and expense are included in other,
net.
Legal and Environmental Matters
The Company is involved in various claims and legal proceedings
of a nature considered normal to its business, including
environmental matters and product liability cases. The recorded
liabilities for these matters at March 31, 1994, were not
material. Management believes that it is remote that costs
materially in excess of the amounts accrued for these matters
will be incurred.
Item 2. Managements' Discussion and Analysis of Financial
Condition and Results of Operations
Results of Operations - three months ended March 31, 1994
compared with the corresponding period in 1993.
Consolidated sales for the first quarter increased $72.0 million
or 7 percent compared with the same period in 1993. Excluding
the effect of foreign currency exchange rate changes,
consolidated sales advanced 8 percent.
In the United States, many of the Company's pharmaceutical
products are subject to competitive pricing as managed care
groups, institutions and the government seek price discounts.
The Clinton health care reform proposal includes several measures
that, if enacted, will have an impact on operations of the
Company. These measures include, but are not limited to, the
requirement of all health plans to offer prescription drug
coverage, the extension of Medicare coverage to include
outpatient drugs, and rebates on Medicare sales.
In most international markets, the Company operates in an
environment of government-mandated cost containment programs.
Sales in Japan have declined in 1994 due to lower sales of INTRON
A, the Company's alpha-2 interferon anticancer and antiviral
agent. Management expects total 1994 sales of INTRON A to
decline in Japan as a result of the recently announced
government-mandated price reduction and a significant drop in the
alpha interferon market. In addition, operations in several
European countries have been impacted by the implementation of
various cost-containment programs and across-the-board price
reductions.
Because the Company is unable to predict the final form and
timing of various domestic and international governmental health
care reform proposals, their effect on future operations and cash
flows cannot be reasonably estimated.
Sales
Domestic prescription pharmaceutical sales increased 15 percent
for the 1994 first quarter. Sales of respiratory products rose
30 percent reflecting incremental sales of CLARITIN, a once-daily
nonsedating antihistamine, following Food and Drug Administration
(FDA) approval in April 1993. Sales growth was also recorded for
the PROVENTIL line of asthma products due to higher prescription
levels for the inhaler formulation. In January 1994, the FDA
issued bioequivalence standards for generic albuterol metered
dose inhalers. Generic entries into the market are not expected
until late 1994 or early 1995. The introduction of such generic
competition will negatively affect sales and profitability of
PROVENTIL. Respiratory growth was moderated by lower sales of
THEO-DUR, a sustained-action theophylline, reflecting increased
generic competition.
U.S. sales of cardiovascular products advanced 7 percent due to
the timing of promotional programs for NITRO-DUR transdermal
nitroglycerin patches and gains for K-DUR potassium supplements.
Sales of dermatological products decreased 19 percent, primarily
reflecting the timing of wholesaler purchases of LOTRISONE, an
antifungal/anti-inflammatory cream.
Domestic sales of the Wesley-Jessen vision care business rose 39
percent in the first quarter due to promotional programs for
colored lenses and the introduction of FRESHLOOK disposable
contact lenses. Animal health product sales increased 20 percent
reflecting incremental sales of OTOMAX, a treatment for canine
ear infections.
International pharmaceutical sales grew 7 percent in the first
quarter after excluding the impact of foreign currency exchange
fluctuations. Sales of respiratory products increased 6 percent,
led by growth for CLARITIN in Latin America. Dermatological
products advanced 12 percent due to gains for topical steroids.
Foreign market sales of anti-infective and anticancer products
were down 9 percent due to the decline of INTRON A in Japan.
This shortfall was moderated by higher sales of CEDAX, a third-
generation cephalosporin, and EULEXIN, a therapy for advanced
prostate cancer.
Health care product sales decreased 5 percent in the first
quarter reflecting lower sales of female health and allergy/cold
products due to the intensely competitive nature of these
categories. These shortfalls were tempered by higher sales of
the upgraded and repackaged DR. SCHOLL'S corn/callus/bunion line,
and new line extensions for LOTRIMIN AF.
Income before income taxes increased 14 percent in the first
quarter, and represented 28.7 percent of sales compared with 26.8
percent in 1993.
Cost of sales as a percentage of sales declined to 21.3 percent
in the first quarter from 21.5 percent last year, reflecting a
favorable sales mix of higher margin ethical pharmaceutical
products, mainly CLARITIN, and continuing cost containment
programs.
Selling, general and administrative expenses represented 38.2
percent of sales for the first three months of 1994 compared with
39.3 percent in 1993. The improved ratio occurred as selling and
promotional spending slowed in international markets.
Research and development spending increased 7 percent for the
first quarter and represented 12.2 percent of sales in both the
1994 and 1993 periods. It is anticipated that total research and
development expenses will approximate $630 million in 1994.
The effective tax rate was 24.0 percent for the first quarter of
1994, compared with 23.5 percent in 1993.
The Omnibus Budget Reconciliation Act of 1993 (The "Act")
increases the U.S. corporate tax rate from 34 percent to 35
percent, restricts deductibility of certain operating expenses,
reduces the tax benefit generated from operations in Puerto Rico
and, in certain circumstances, taxes a portion of undistributed
earnings of foreign subsidiaries. Management estimates that the
primary impact on the Company is the reduction in the benefit
arising from its operations in Puerto Rico. This reduction in
benefit is to be phased-in over a five-year period.
The impact of the Act on the 1994 effective tax rate was less
than the Company had originally anticipated. However, management
does estimate the Act will unfavorably impact the effective tax
rate an additional 1.5 to 2.0 percentage points by 1996.
Accounting Change
During the first quarter of 1993, the Company adopted Statement
of Financial Accounting Standards (SFAS) No. 106, "Employers'
Accounting for Postretirement Benefits Other Than Pensions". In
connection with this adoption, the Company fully funded its
initial accumulated benefit obligation. The cumulative effect of
adopting SFAS No. 106 was a one-time, after-tax charge of $94.2
million, or $.48 per common share.
Earnings per common share before the accounting change increased
16 percent in the first quarter to $1.31 from $1.13 in 1993.
Excluding the impact of changes in foreign currency exchange
rate, earnings per common share before the accounting change
would have risen approximately 19 percent in the first quarter.
Liquidity and financial resources - three months ended March 31,
1994.
During the first three months of 1994, total cash and
investments, which includes principally cash and cash equivalents
and short- term investments, declined $203.3 million and total
debt decreased $165.0 million. These changes increased the
Company's net debt position (debt less cash and investments) to
$862.6 million from $824.3 million at year-end 1993. The
unfavorable change in the net debt position does not reflect an
unusual occurrence as heavy seasonal sales in the first quarter
are normal. Cash provided from operations amounted to $142.2
million for the first three months of 1994. However, spending of
$87.1 million for shareholder dividends, $59.2 million for
capital expenditures and $31.1 million for common share
repurchases caused the net debt position to increase.
In February 1993, the Board of Directors authorized the purchase
of $500 million of the Company's shares. As of March 31, 1994,
this program was approximately 84 percent complete.
The Company's liquidity and financial resources continue to be
sufficient to meet its operating needs.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
The Company is a defendant in more than sixty antitrust lawsuits
filed in state and federal courts in several states, including
California, Georgia, Illinois, Louisiana, Minnesota, New York,
Pennsylvania, South Carolina and Texas. More than fifty of these
are class action lawsuits. These actions were commenced in the
second half of 1993 and in 1994 by independent and chain
pharmacies against the Company and other pharmaceutical
manufacturers, and in some instances, wholesalers and mail order
pharmacies, alleging (1) conspiracy to restrain trade by jointly
refusing to sell pharmaceuticals at discounted prices to
plaintiffs, and/or (2) price discrimination. The federal cases
have all been consolidated in the United States District Court
for the Northern District of Illinois for pre-trial and possibly
trial purposes. Plaintiffs seek treble damages in an unspecified
amount and an injunction against the allegedly unlawful conduct.
The Company has not conspired to restrain trade and believes that
its pricing practices have been and are in compliance with the
law. The Company will defend itself vigorously against the
claims in all these actions. While it is not feasible to predict
or determine the outcome of these actions, management believes
that such actions should not result in any liability which would
have a material adverse effect on the Company's consolidated
financial position or results of operations.
Item 4. Submission of Matter to a Vote of Security Holders
(a) The Annual Meeting of Shareholders was held on April 26,
1994.
(b) Not applicable.
(c) The designation of Deloitte & Touche to audit the books and
accounts of the Company for the year ending December 31,
1994 was ratified by a vote of shares, as follows:
FOR AGAINST ABSTAIN
173,233,080 424,435 522,106
All of the nominees for director were elected for a three
year term by a vote of shares, as follows:
FOR WITHHELD
David C. Garfield 172,927,613 1,252,008
Robert P. Luciano 172,941,539 1,238,082
H. Barclay Morley 172,919,080 1,260,541
Approval of Executive Incentive Bonus Program including
Performance Goals, by a vote of shares, as follows:
FOR AGAINST ABSTAIN
161,480,059 9,134,788 3,564,744
(d) None
Item 6. Exhibits and Reports on Form 8-K
a) Exhibits:
Exhibit 10 - The Company's Executive Incentive Plan (as
amended) filed with this document.
Exhibit 11 - Computation of Earnings Per Common Share
filed with this document
b) Reports on Form 8-K:
No report has been filed during the three months ended March
31, 1994.
SIGNATURE(S)
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.
Schering-Plough Corporation
(Registrant)
Date May 4, 1994 /s/ Thomas H. Kelly
Thomas H. Kelly
Vice President and Controller