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 June 30, 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 June 30, 1994: 192,039,778
PART I. - FINANCIAL INFORMATION
Item 1. Financial Statements
SCHERING-PLOUGH CORPORATION AND SUBSIDIARIES
STATEMENTS OF CONSOLIDATED INCOME
(UNAUDITED)
(Dollars in millions, except per share figures)
Three Months Six Months
Ended Ended
June 30 June 30
1994 1993 1994 1993
Sales . . . . . . . . . . . . . . $1,190.1 $1,123.4 $2,351.7 $2,213.0
Costs and expenses:
Cost of sales. . . . . . . . . . 246.0 236.7 493.3 470.9
Selling, general
and administrative. . . . . . . 459.7 453.4 903.1 881.2
Research and development . . . . 152.0 147.5 294.0 280.4
Other expense, net . . . . . . . 15.6 7.0 11.4 9.6
873.3 844.6 1,701.8 1,642.1
Income before income taxes. . . . 316.8 278.8 649.9 570.9
Income taxes. . . . . . . . . . 76.1 65.6 156.0 134.2
Income before cumulative effect
of accounting change . . . . . . 240.7 213.2 493.9 436.7
Cumulative effect of
accounting change . . . . . . . - - - (94.2)
Net income. . . . . . . . . . . . $ 240.7 $ 213.2 $ 493.9 $ 342.5
Earnings per common share
before cumulative effect of
accounting change. . . . . . . . $ 1.25 $ 1.09 $ 2.56 $ 2.22
Cumulative effect of
accounting change. . . . . . . . - - - (.48)
Earnings per common share . . . . $ 1.25 $ 1.09 $ 2.56 $ 1.74
Dividends per common share. . . . $ .51 $ .45 $ .96 $ .84
<FN>
See notes to consolidated financial statements.
PAGE
SCHERING-PLOUGH CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
(Dollars in millions, except per share figures)
June 30, December 31,
1994 1993
Assets
Cash and cash equivalents . . . . . . . . $ 100.7 $ 222.2
Short-term investments. . . . . . . . . . 114.7 207.2
Accounts receivable, net. . . . . . . . . 819.3 687.1
Inventories . . . . . . . . . . . . . . . 470.3 404.6
Prepaid expenses, deferred income
taxes and other current assets . . . . . 418.4 379.4
Total current assets. . . . . . . . . 1,923.4 1,900.5
Property, plant and equipment . . . . . . 2,946.6 2,838.9
Less accumulated depreciation . . . . . . 923.5 871.2
Property, net . . . . . . . . . . . . 2,023.1 1,967.7
Intangible assets, net. . . . . . . . . . 177.4 182.5
Other assets. . . . . . . . . . . . . . . 290.7 266.2
$4,414.6 $4,316.9
Liabilities and Shareholders' Equity
Accounts payable. . . . . . . . . . . . . $ 231.0 $ 249.0
Short-term borrowings and current
portion of long-term debt. . . . . . . . 820.1 1,076.0
Other accrued liabilities . . . . . . . . 884.6 807.4
Total current liabilities . . . . . . 1,935.7 2,132.4
Long-term debt. . . . . . . . . . . . . . 181.5 182.3
Other long-term liabilities . . . . . . . 476.6 420.3
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 . . . . . . . . . . . . . 88.8 80.9
Retained earnings . . . . . . . . . . . . 3,744.0 3,435.6
Foreign currency translation
adjustment and other . . . . . . . . . . (89.0) (116.2)
Total . . . . . . . . . . . . . . . . 3,995.3 3,651.8
Less treasury shares, at cost - 1994,
59,442,913 shares; 1993, 57,927,994
shares . . . . . . . . . . . . . . . . . 2,174.5 2,069.9
Total shareholders' equity. . . . . . 1,820.8 1,581.9
$4,414.6 $4,316.9
<FN>
See notes to consolidated financial statements.
PAGE
SCHERING-PLOUGH CORPORATION AND SUBSIDIARIES
STATEMENTS OF CONSOLIDATED CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30
(UNAUDITED)
(Dollars in millions)
1994 1993
Operating Activities:
Net income. . . . . . . . . . . . . . . . $ 493.9 $ 342.5
Depreciation and amortization . . . . . . 77.3 69.8
Working capital changes - source (use):
Accounts receivable. . . . . . . . . . . (107.5) (150.0)
Inventories. . . . . . . . . . . . . . . (42.6) (21.5)
Other current assets . . . . . . . . . . (28.7) (45.9)
Accounts payable and other accrued
liabilities . . . . . . . . . . . . . . 22.5 38.4
Other, net. . . . . . . . . . . . . . . . 5.3 (13.7)
Net cash provided by operating
activities . . . . . . . . . . . . . . . 420.2 219.6
Investing Activities:
Capital expenditures. . . . . . . . . . . (133.8) (185.2)
Purchases of investments. . . . . . . . . (11.9) (128.8)
Reduction of investments. . . . . . . . . 98.7 3.7
Other, net. . . . . . . . . . . . . . . . .2 (2.6)
Net cash used for investing activities. . (46.8) (312.9)
Financing Activities:
Net change in short-term borrowings . . . (261.4) 225.1
Dividends paid to common shareholders . . (185.4) (165.5)
Common shares repurchased . . . . . . . . (105.0) (292.4)
Redeemable partnership interest . . . . . 50.0 -
Proceeds from other equity
transactions . . . . . . . . . . . . . . 6.8 14.4
Other, net. . . . . . . . . . . . . . . . .1 (17.9)
Net cash used for financing activities. . (494.9) (236.3)
Effect of Exchange Rates on Cash and
Cash Equivalents. . . . . . . . . . . . . - (.4)
Net Decrease in Cash and
Cash Equivalents. . . . . . . . . . . . . (121.5) (330.0)
Cash and Cash Equivalents, Beginning
of Period . . . . . . . . . . . . . . . . 222.2 406.3
Cash and Cash Equivalents, End of Period . $ 100.7 $ 76.3
<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 $195.1 at June 30, 1994.
This includes $114.7 in short-term investments and $77.0 of securities
held in trust for employee benefit purposes. Substantially all
investments in debt securities mature within one year. Unrealized gains
and losses at June 30, 1994, and realized gains and losses during the six
months ended June 30, 1994, based on the specific identification method,
were not material.
Redeemable Interest in Partnership
Certain Company subsidiaries and a financial institution funded a
partnership that has purchased outstanding shares of the Company's stock.
The partnership is majority owned by the subsidiaries; therefore the
consolidated financial statements include the partnership. The Company
stock purchased by the partnership is reported as treasury shares.
As of June 30, 1994, $50.0 has been advanced to the partnership by the
financial institution and is included with other long-term liabilities.
The partnership pays a return equal to a LIBOR-based floating rate on the
funds advanced. All advances are subject to mandatory redemption in
February 1998. The obligation of the Company and the subsidiaries for the
advances to the partnership are subordinate to all other unsecured claims
of general creditors of the Company and its subsidiaries.
Inventories
Inventories consisted of:
June 30, December 31,
1994 1993
Finished products . . . . . . . $ 164.7 $ 168.3
Goods in process. . . . . . . . 127.8 95.5
Raw materials and supplies. . . 177.8 140.8
Total inventories . . . . . . $ 470.3 $ 404.6
Sales
Sales for the six months ended June 30, 1994 and 1993 were as follows:
1994 1993
Pharmaceutical products . . . . $1,973.7 $1,807.3
Health care products. . . . . . 378.0 405.7
Consolidated sales. . . . . . $2,351.7 $2,213.0
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 six months ended June 30, 1994 and 1993 were
192,968,000 and 196,667,000, respectively.
Interest Income and Interest Expense
Interest income for the three and six months ended June 30, 1994 was $3.9
and $7.8, respectively. The corresponding amounts in 1993 were $5.0 and
$10.8, respectively. Interest expense for the three and six months ended
June 30, 1994 was $12.6 and $23.2, respectively. The corresponding
amounts in 1993 were $12.5 and $20.3, 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 June 30, 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. Management's Discussion and Analysis of Financial
Condition and Results of Operations
Results of Operations - three and six months ended June 30, 1994 compared
with the corresponding periods in 1993.
Consolidated sales for the second quarter increased $66.7 million or 6
percent compared with the same period in 1993. For the six months, sales
rose $138.7 million or 6 percent over 1993. Excluding the effect of
foreign currency exchange rate changes, consolidated sales grew 7 percent
in both the second quarter and six-month period.
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. Certain health care reform proposals
include 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 sharply 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 in Japan to be substantially lower than 1993
as a result of various actions by the Japanese health authorities to
control health care costs, including an April 1 price cut. 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 23 percent for the
1994 second quarter and 19 percent for the six-month period. Sales of
respiratory products advanced 39 percent in the quarter and 34 percent for
the first half, reflecting significant growth for CLARITIN, a nonsedating
antihistamine, which received Food and Drug Administration (FDA) approval
in April 1993. Sales growth in both periods was also aided by increases
for VANCENASE allergy and VANCERIL asthma products, as well as for the
PROVENTIL line of asthma products. Despite generic competition for the
tablet, syrup and solution formulations, PROVENTIL sales advanced due to
higher prescription levels for the metered dose inhaler.
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 anti-infective and anticancer products rose 11 percent in
the quarter and 7 percent for the six-month period, due to gains for
EULEXIN, a prostate cancer therapy, and INTRON A.
Domestic sales of the Wesley-Jessen vision care business advanced 44
percent and 42 percent for the three- and six- month periods,
respectively, reflecting the launch of FRESHLOOK disposable contact
lenses.
International pharmaceutical sales were essentially flat versus the prior
year's second quarter, but increased 3 percent for the six months after
excluding the impact of foreign currency exchange fluctuations. This
sales performance resulted from declines for anti-infective and anticancer
products of 14 percent in the quarter and 12 percent for the six-month
period, due to lower INTRON A sales. Sales of INTRON A in Japan declined
approximately 50 percent in both the quarter and six months. This
shortfall was offset by sales growth of other products throughout the rest
of the world.
Foreign market sales of dermatological products grew 20 percent in the
quarter and 16 percent in the first half, reflecting gains for topical
steroids. Respiratory product sales advanced 6 percent in both the three-
and six-month period, led by growth for CLARITIN in Latin America. Sales
growth also occurred for LOSEC, an anti-ulcer treatment licensed from AB
Astra.
Health care product sales decreased 9 percent in the quarter and 7 percent
in the six months, reflecting lower sales of female health and
allergy/cold products due to the intensely competitive nature of these
categories. Sales of foot care products declined 6 percent in the second
quarter and were essentially flat versus the six months of 1993. The
year-to-year comparisons were impacted by the relaunch of the DR. SCHOLL'S
insole line during the 1993 second quarter that resulted in heavy trade
purchases. Sun care products sales advanced 22 percent in the quarter and
4 percent for the six-month period, led by increases for products offering
high sun protection factors.
Income before income taxes increased 14 percent for the quarter as
compared with 1993, and represented 26.6 percent of sales versus 24.8
percent last year. For the six months, income before income taxes also
grew 14 percent over 1993, representing 27.6 percent of sales compared
with 25.8 percent last year.
Cost of sales as a percentage of sales declined to 20.7 percent from 21.1
percent in the quarter. For the first half, the ratio decreased to 21.0
percent from 21.3 percent. The lower ratios were primarily due to a
favorable sales mix of higher margin ethical pharmaceutical products.
Selling, general and administrative expenses represented 38.6 percent of
sales in the second quarter compared with 40.4 percent last year. For the
six months, the ratio was 38.4 percent versus 39.8 percent in 1993. The
improved ratios occurred as 1993 expenses included costs for the U.S.
launch of CLARITIN, and 1994 selling and promotional spending slowed in
international markets.
Research and development expenses increased 3 percent in the quarter,
representing 12.8 percent of sales compared with 13.1 percent a year ago.
For the first half, spending grew 5 percent and represented 12.5 percent
of sales versus 12.7 percent in 1993. The slower growth rates reflect
year-to-year timing of clinical grant spending. The Company anticipates
that growth in research and development expenses will accelerate in the
last half of the year.
The effective tax rate was 24.0 percent for both the three- and six-month
periods in 1994, compared with 23.5 percent for the same periods 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 which
began in 1994.
The impact of the Act on the 1994 effective tax rate was less than the
Company had originally anticipated. However, management believes the Act
could 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". 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 increased 15 percent in the second quarter to
$1.25 from $1.09 in 1993. Excluding the impact of changes in foreign
currency exchange rates, earnings per common share would have risen
approximately 18 percent in the quarter.
For the six months,earnings per common share before the accounting change
advanced 15 percent to $2.56 from $2.22 last year. Excluding the impact
of changes in foreign currency exchange rates, earnings per common share
before the accounting change would have risen approximately 19 percent for
the six months.
Liquidity and financial resources - six months ended June 30, 1994.
During the first half of 1994, total cash and investments, which includes
cash and cash equivalents and short- and long- term investments, declined
$215.2 million and total debt declined $206.7 million. The Company's net
debt position (debt less cash and investments) totaled $832.8 million,
essentially flat with the $824.3 million net debt position at year-end
1993. Cash provided from operations totaled $420.2 million for the first
six months. However, spending of $185.4 million for shareholder
dividends, $133.8 million for capital expenditures and $105.0 million for
common share repurchases caused the net debt position to remain
essentially at the year-end 1993 level.
In February 1993, the Board of Directors authorized the purchase of $500
million of the Company's shares. As of June 30, 1994, this program was
approximately 98 percent complete.
During 1994, the Company and a financial institution funded a partnership
that has purchased outstanding shares of the Company's stock. As of June
30, 1994, $50 million has been advanced to the partnership by the
financial institution, and is included as other long-term liabilities.
All advances are subject to mandatory redemption in February 1998, and
these advances are considered as debt for purposes of this liquidity
discussion. The obligation of the Company for the advances to the
partnership is subordinate to all other unsecured claims
of general creditors of the Company and its subsidiaries.
The Company's liquidity and financial resources continue to be sufficient
to meet its operating needs.
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
a) Exhibits:
Exhibit
Number Description
10(a) - First Amendment to Employment Agreement
between the Company and Robert P. Luciano
10(b) - First Amendment to Employment Agreement
between the Company and Richard J. Kogan
10(c) - Employment Agreement between the Company
and Hugh D'Andrade
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
June 30, 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 July 27, 1994 /s/ Thomas H. Kelly
Thomas H. Kelly
Vice President and Controller