Exhibit 13
Financial Section of the Company's 1994 Annual Report to Shareholders
Management's Discussion and Analysis of Operations and Financial
Condition
Sales
Consolidated sales in 1994 totaled $4.66 billion, an increase of
$315.8 million, or 7 percent, over 1993, reflecting volume growth
of 5 percent and price increases of 2 percent. This performance
was primarily due to significant sales gains for the CLARITIN
brand of nonsedating antihistamines. CLARITIN-D, a combination
product with a decongestant, was launched domestically in
November 1994. Worldwide CLARITIN brand sales totaled $505
million in 1994. Consolidated sales in 1994 were also affected
by a sharp decline in sales of INTRON A, the Company's alpha
interferon anticancer and antiviral agent, in Japan.
Consolidated 1993 sales of $4.34 billion advanced $285.6 million,
or 7 percent, over 1992, as volume growth of 7 percent and price
increases of 2 percent were tempered by unfavorable foreign
exchange of 2 percent. This growth was primarily the result of
gains for INTRON A and the domestic introduction of CLARITIN.
Worldwide 1994 pharmaceutical sales of $4.0 billion rose $360.0
million, or 10 percent, over 1993, reflecting volume growth of 7
percent, price increases of 2 percent and favorable foreign
exchange rate fluctuations of 1 percent. Worldwide sales of
pharmaceutical products in 1993 increased $281.2 million, or 8
percent, over 1992, as volume growth of 8 percent and price
increases of 2 percent were moderated by unfavorable foreign
exchange of 2 percent.
Domestic prescription pharmaceutical product sales grew $299.1
million, or 20 percent, in 1994. Sales of respiratory products
increased 30 percent due to continued strong growth of the
CLARITIN brand and advances for the VANCENASE line of allergy
products and VANCERIL line of asthma products.
The respiratory sales gain also reflects higher sales of the
PROVENTIL (albuterol) line of asthma products, resulting from
prescription growth for the metered dose inhaler and higher
branded and generic sales of the solution formulation. Sales of
the PROVENTIL line totaled $396 million in 1994. The PROVENTIL
formulations of solution, syrup and tablets are subject to
generic competition. In January 1994, the Food and Drug
Administration (FDA) issued bioequivalence standards for generic
albuterol metered dose inhalers. Generic competitors are
expected to enter the market in the future. The introduction of
a generic inhaler 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.
Domestic sales of anti-infective and anticancer products rose 8
percent compared with 1993, due to gains for INTRON A and
EULEXIN, a therapy for advanced prostate cancer. Dermatological
products grew 5 percent, as increased promotional activities
aided sales of LOTRISONE, an antifungal/anti-inflammatory cream.
Sales of cardiovascular products advanced 4 percent, reflecting
increases for K-DUR potassium supplements and IMDUR, an oral
nitrate for angina.
Domestic prescription pharmaceutical sales in 1993 advanced 10
percent over 1992, led by gains in respiratory products,
reflecting the launch of CLARITIN. Sales of cardiovascular and
anti-infective and anticancer products also grew.
In 1994, sales of international pharmaceutical products increased
$48.0 million, or 2 percent. Excluding the impact of foreign
currency exchange rate fluctuations, sales would have risen
approximately 1 percent. Sales in 1994 were significantly
impacted by a sharp decline of INTRON A sales in Japan.
International sales of respiratory products advanced 10 percent
over 1993, led by growth for CLARITIN. Dermatological products
sales increased 15 percent, largely due to gains for topical
steroids in Latin American and major European markets. Sales of
cardiovascular products rose 19 percent, reflecting higher sales
of NITRO-DUR transdermal nitroglycerin patches.
International sales of anti-infective and anticancer products
declined 14 percent in 1994 due to lower sales of INTRON A in
Japan, as various actions by the Japanese health authorities to
control health care costs, including a mandated price reduction,
resulted in a drastic decline in the interferon market. Sales of
INTRON A in Japan decreased to $141 million in 1994 from $307
million in 1993. Sales of anti-infective and anticancer products
were aided by growth of EULEXIN in major European markets and
higher sales of CEDAX, a third-generation cephalosporin. Also
contributing to the overall international sales growth were gains
for LOSEC, an anti-ulcer treatment licensed from AB Astra.
In 1993, international pharmaceutical sales, excluding foreign
exchange, increased 13 percent over 1992, reflecting significant
INTRON A sales growth in Japan, coupled with higher sales of
respiratory and cardiovascular products.
Sales of health care products in 1994 decreased $44.2 million, or
6 percent, compared with 1993, as price increases of 3 percent
were more than offset by volume declines of 9 percent. Over-the-
counter product sales declined 15 percent, largely due to
increasingly competitive markets for vaginal antifungal and
allergy/cold products. Foot care sales rose 3 percent,
reflecting sales of the upgraded and repackaged DR. SCHOLL'S
corn/callus/bunion line, coupled with spray and powder line
extensions for LOTRIMIN AF, an antifungal. Sun care sales
declined slightly from 1993 levels.
In 1993, health care product sales increased $4.4 million, or 1
percent, over 1992, as price increases of 2 percent were
partially offset by volume declines of 1 percent. The sales
growth largely reflects higher sales of foot care and sun care
products, moderated by lower sales of female health and
allergy/cold products.
Income Before Income Taxes
Income before income taxes totaled $1,213.2 million in 1994, an
increase of $134.8 million, or 13 percent, over 1993. In 1993,
income before income taxes of $1,078.4 million grew $124.5
million, or 13 percent, over the $953.9 million in 1992.
Summary of Costs and Expenses:
(Dollars in millions)
% Increase/(Decrease)
1994 1993 1992 1994/93 1993/92
Cost of sales . . . . . . $ 958.6 $ 908.8 $ 900.6 5 % 1 %
% of sales . . . . . . . 20.6 % 20.9 % 22.2 %
Selling, general and
administrative . . . . . $1,828.9 $1,747.4 $1,629.8 5 % 7 %
% of sales . . . . . . . 39.3 % 40.3 % 40.2 %
Research and development. $ 620.0 $ 577.6 $ 521.5 7 % 11 %
% of sales . . . . . . . 13.3 % 13.3 % 12.9 %
Other expense, net $ 36.4 $ 29.1 $ 49.9 25 % (42)%
% of sales . . . . . . . .8 % .7 % 1.2 %
____________________________________________________________________________________________
Cost of sales as a percentage of sales declined to 20.6 percent
in 1994 from 20.9 percent in 1993 and 22.2 percent in 1992. The
improvements reflect the 1993 launch of CLARITIN in the United
States, a change in sales mix to higher margin ethical
pharmaceutical products in several international markets, and
continuing cost containment efforts.
Selling, general and administrative expenses represented 39.3
percent of sales in 1994, 40.3 percent in 1993 and 40.2 percent
in 1992. The decline as a percentage of sales in 1994 from 1993
reflects lower promotional spending for CLARITIN following the
1993 domestic launch, and reduced spending for female health care
products. The increase as a percentage of sales between 1993 and
1992 was due to higher promotional and selling expenses to
support the launch of CLARITIN in the United States.
Research and development expenses increased $42.4 million, or 7
percent, representing 13.3 percent of sales in 1994 and 1993 and
12.9 percent of sales in 1992. The higher spending reflects the
Company's ongoing commitment to provide the resources necessary
to develop a steady flow of innovative products and line
extensions.
Other expense, net consists of interest income, interest expense,
foreign exchange gains and losses, and non-recurring items. In
1994, the net expense increased $7.3 million, as higher interest
expense and a decline in interest income were moderated by lower
foreign exchange losses. The decrease in expense between 1993 and
1992 reflects favorable foreign exchange in Japan and Ireland,
and reduced interest expense, tempered by lower interest income.
Income Taxes
The Company's effective tax rate was 24.0 percent in 1994, 23.5
percent in 1993 and 24.5 percent in 1992. The effective tax rate
for each period was lower than the U.S. statutory income tax
rate, primarily due to tax incentives in Puerto Rico and lower
foreign tax rates.
The Omnibus Budget Reconciliation Act of 1993 (the "Act")
increased the U.S. corporate tax rate from 34 percent in 1992 to
35 percent, restricted deductibility of certain operating
expenses, reduced the tax benefit generated from operations in
Puerto Rico and, in certain circumstances, taxed 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 estimates the Act could increase the
effective tax rate an additional 2.0 percentage points beginning
in 1996.
For additional information, see "Income Taxes" in the Notes to
Consolidated Financial Statements on page 30.
Accounting Changes And Extraordinary Item
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
cumulative effect of adopting SFAS No. 106 was a one-time, after-
tax charge of $94.2 million, or $.48 per common share. For
additional information on this transaction, see "Other Post-
retirement Benefits" in the Notes to Consolidated Financial
Statements on page 29.
In 1992, the Company adopted SFAS No. 109, "Accounting for Income
Taxes." The cumulative effect of implementing SFAS No. 109 was a
one-time gain of $27.1 million, or $.13 per common share. Also
in 1992, the Company effected an in-substance defeasance of its
zero-coupon debt, which resulted in an extraordinary loss of
$26.7 million, or $.13 per common share. For additional
information on these transactions, see "Income Taxes" and
"Borrowings" in the Notes to Consolidated Financial Statements on
pages 30 and 26, respectively.
Net Income
Income in 1994, excluding the cumulative effect of an accounting
change in 1993, increased $97.0 million, or 12 percent, to
$922.0 million. Income in 1993 advanced $105.0 million, or 15
percent, over 1992 when excluding the extraordinary item and the
cumulative effect of the accounting changes. Differences in
year-to-year exchange rates reduced comparative income growth in
1994 and 1993. After eliminating these exchange differences,
income would have risen approximately 13 percent in 1994 and 18
percent in 1993.
Earnings Per Common Share
Earnings per common share were as follows:
1994 1993 1992
Earnings per common share before the
extraordinary item and accounting
changes $ 4.82 $ 4.23 $ 3.60
Extraordinary item - - (.13)
Accounting changes - (.48) .13
Earnings per common share $ 4.82 $ 3.75 $ 3.60
Average shares outstanding
(in millions) 191.3 195.1 200.2
Earnings per common share rose 14 percent in 1994 and 18 percent
in 1993, when excluding the extraordinary item and accounting
changes. Earnings per common share increased at a faster rate
than income, due to the Company's share repurchase programs.
Fluctuations in year-to-year exchange rates have reduced
comparative growth in earnings per common share. Excluding the
impact of these exchange differences, earnings per common share
before the extraordinary item and accounting changes would have
increased approximately 15 percent in 1994 and 21 percent in
1993.
Over the past three years, the Board of Directors has authorized
several share repurchase programs. Under these programs,
approximately 8.6 million common shares were purchased in 1994,
7.0 million common shares in 1993 and 3.1 million common shares
in 1992. At year-end 1994, the most recent $500 million program
was 97 percent complete. This program was completed in February
1995.
Environmental Matters
The Company has obligations for environmental safety and clean-up
under various state, local and federal laws, including the
Comprehensive Environmental Response, Compensation and Liability
Act, commonly known as Superfund. Environmental expenditures
have not had and, based on information currently available, are
not anticipated to have a material impact on the Company's
financial statements. For additional information, see "Legal and
Environmental Matters" in the Notes to Consolidated Financial
Statements on page 32.
Additional Factors Influencing Operations
Vision Care Business
With the 1994 launch of its disposable contact lenses, the
Company's Wesley-Jessen subsidiary is now able to compete in the
fastest-growing segment of the contact lens market. Prior to
this time, Wesley-Jessen's business had been restricted to the
conventional lens segment, which has been contracting for a
number of years.
Wesley-Jessen's progression to becoming a full-fledged competitor
in the contact lens business resulted from Company investments in
research and capital in excess of $150 million. Having achieved
this objective for the business, the Company is exploring a
number of courses of action, including a strategic alliance,
licensing, divestiture or the continuation of present operations.
At this time, the outcome of this exploratory process is unknown.
The Company hopes to conclude on a course of action in 1995.
Health Care Reform
In the United States, many of the Company's pharmaceutical
products are subject to increasingly competitive pricing as
managed care groups, institutions and governments seek price
discounts. Future health care reform proposals also could have
an impact on operations of the Company.
In most international markets, the Company operates in an
environment of government-mandated cost containment programs.
Sales in Japan declined significantly in 1994, due to the impact
of various cost containment efforts by the Japanese health
authorities on the overall interferon market. INTRON A sales
decreased as a result of a mandated price cut and government-
imposed restrictions. In addition, several other markets have
placed restrictions on physician prescription levels and patient
reimbursements, emphasized greater generic usage and enacted
across-the-board price cuts as further methods of cost control.
Since the Company is unable to predict the final form and timing
of any domestic and international governmental health care reform
proposals, their effect on future operations and cash flows
cannot be reasonably estimated.
Foreign Exchange
Sales outside of the United States represented 45 percent of
total sales in 1994 and 47 percent in 1993. Fluctuating foreign
exchange rates have affected sales and earnings, as previously
discussed. Sales and earnings growth in 1995 will be negatively
affected if the U.S. dollar strengthens. The Company continues
to implement selective hedging strategies to mitigate the
possible adverse effects of 1995 exchange rate changes. For
additional information on these strategies, see "Financial
Instruments" in the Notes to Consolidated Financial Statements on
page 24.
Inflation
Inflation has had only a minimal impact on operations in recent
years.
Liquidity and Financial Resources
Cash generated from operations and selected borrowings continues
to be the Company's major source of funds to finance working
capital, additions to property and shareholder dividends.
Cash provided by operating activities totaled $1,282.5 million in
1994, $962.1 million in 1993 and $691.9 million in 1992. The
1993 amount was reduced by $147.0 million for the funding of the
Company's initial accumulated post-retirement benefit obligation.
Capital expenditures amounted to $271.6 million in 1994, $365.2
million in 1993 and $403.2 million in 1992. It is anticipated
that expenditures will approximate $350 million in 1995, mainly
reflecting initial construction of a bulk chemical plant in
Singapore and construction of a nonsterile facility in Mexico.
Commitments for 1995 capital expenditures totaled $58.3 million
at December 31, 1994.
Common shares repurchased in 1994 totaled 8.6 million shares at a
cost of $599.4 million. In 1993, 7.0 million shares were
repurchased for $418.3 million, and 3.1 million shares were
repurchased in 1992 at a cost of $171.0 million.
Dividend payments of $379.4 million were made in 1994, compared
with $339.6 million in 1993 and $300.2 million in 1992. These
increases reflect dividends per common share paid to shareholders
of $1.98 per share in 1994, up from $1.74 per share in 1993 and
$1.50 in 1992.
Short-term borrowings totaled $782.3 million at year-end 1994,
$1,076.0 million in 1993 and $946.0 million in 1992. The decline
in 1994 primarily reflects cash generated from domestic
operations and the sale of investments.
The Company's ratio of debt to total capital decreased to 38
percent in 1994 from 44 percent in 1993, as a result of the
reduction in short-term debt. The Company's liquidity and
financial resources continue to be sufficient to meet its
operating needs. As of December 31, 1994, the Company had $866.6
million in unused lines of credit, of which $541.5 million was in
support of commercial paper borrowings. The Company had A-1+ and
P-1 ratings for its commercial paper, and AA and Aa3 general bond
ratings from Standard and Poor's and Moody's, respectively, as of
December 31, 1994.
Schering-Plough Corporation and Subsidiaries
Statements of Consolidated Income
(Dollars in millions, except per share figures)
For The Years Ended December 31, 1994 1993 1992
Sales . . . . . . . . . . . . . . . . . . . . . $4,657.1 $4,341.3 $4,055.7
Costs and Expenses:
Cost of sales . . . . . . . . . . . . . . . . 958.6 908.8 900.6
Selling, general and administrative . . . . . 1,828.9 1,747.4 1,629.8
Research and development. . . . . . . . . . . 620.0 577.6 521.5
Other expense, net. . . . . . . . . . . . . . 36.4 29.1 49.9
Total costs and expenses . . . . . . . . . . 3,443.9 3,262.9 3,101.8
Income before Income Taxes. . . . . . . . . . . 1,213.2 1,078.4 953.9
Income taxes. . . . . . . . . . . . . . . . . 291.2 253.4 233.9
Income before extraordinary item and
cumulative effect of accounting changes. . . . 922.0 825.0 720.0
Extraordinary Item. . . . . . . . . . . . . . - - (26.7)
Cumulative effect of accounting changes . . . - (94.2) 27.1
___________________________________________________________________________________
Net Income. . . . . . . . . . . . . . . . . . . $ 922.0 $ 730.8 $ 720.4
Earnings per common share before extraordinary
item and cumulative effect of accounting changes $ 4.82 $ 4.23 $ 3.60
Extraordinary item. . . . . . . . . . . . . . - - (.13)
Cumulative effect of accounting changes . . . - (.48) .13
___________________________________________________________________________________
Earnings Per Common Share . . . . . . . . . . . $ 4.82 $ 3.75 $ 3.60
Statements of Consolidated Retained Earnings
(Dollars in millions, except per share figures)
For The Years Ended December 31, 1994 1993 1992
Retained Earnings, Beginning of Year. . . . . . $3,435.6 $3,044.4 $2,624.2
Net income. . . . . . . . . . . . . . . . . . . 922.0 730.8 720.4
Cash dividends on common shares (per share:
1994, $1.98; 1993, $1.74; and 1992, $1.50) . . (379.4) (339.6) (300.2)
___________________________________________________________________________________
Retained Earnings, End of Year. . . . . . . . . $3,978.2 $3,435.6 $3,044.4
<FN>
See Notes to Consolidated Financial Statements.
Schering-Plough Corporation and Subsidiaries
Statements of Consolidated Cash Flows
(Dollars in millions)
For The Years Ended December 31, 1994 1993 1992
Operating Activities:
Net income . . . . . . . . . . . . . . . . . . . . . $ 922.0 $ 730.8 $ 720.4
Depreciation and amortization. . . . . . . . . . . . 157.6 142.4 135.0
Working capital changes - source (use):
Accounts receivable . . . . . . . . . . . . . . . 73.0 48.4 (246.5)
Inventories . . . . . . . . . . . . . . . . . . . (41.5) (11.4) (28.8)
Other current assets. . . . . . . . . . . . . . . (107.6) (41.2) (78.1)
Accounts payable, income taxes and accrued
liabilities. . . . . . . . . . . . . . . . . . . 166.4 101.9 142.2
Other, net . . . . . . . . . . . . . . . . . . . . . 112.6 (8.8) 47.7
Net cash provided by operating activities. . . . . . 1,282.5 962.1 691.9
Investing Activities:
Capital expenditures . . . . . . . . . . . . . . . . (271.6) (365.2) (403.2)
Reduction of investments . . . . . . . . . . . . . . 181.0 192.7 323.0
Purchases of investments . . . . . . . . . . . . . . (19.1) (287.1) (93.1)
Other, net . . . . . . . . . . . . . . . . . . . . . (41.1) (18.1) (2.5)
Net cash used for investing activities (150.8) (477.7) (175.8)
Financing Activities:
Common shares repurchased. . . . . . . . . . . . . . (599.4) (418.3) (171.0)
Cash dividends paid to common shareholders . . . . . (379.4) (339.6) (300.2)
Net change in short-term borrowings. . . . . . . . . (292.1) 120.0 352.1
Net change in long-term debt . . . . . . . . . . . . 3.7 (.6) (580.3)
Proceeds from other equity transactions. . . . . . . 33.1 33.7 18.7
Other, net . . . . . . . . . . . . . . . . . . . . . - (62.3) (9.7)
Net cash used for financing activities . . . . . . . (1,234.1) (667.1) (690.4)
Effect of Exchange Rates on Cash and Cash Equivalents. (4.2) (1.4) (3.7)
Net Decrease in Cash and Cash Equivalents. . . . . . . (106.6) (184.1) (178.0)
Cash and Cash Equivalents, Beginning of Year . . . . . 222.2 406.3 584.3
Cash and Cash Equivalents, End of Year . . . . . . . . $ 115.6 $ 222.2 $ 406.3
_______________________________________________________________________________________
<FN>
See Notes to Consolidated Financial Statements.
Schering-Plough Corporation and Subsidiaries
Consolidated Balance Sheets
(Dollars in millions, except per share figures)
At December 31, 1994 1993
ASSETS
__________________________________________________________________________
Current Assets:
Cash and cash equivalents. . . . . . . . . . . $ 115.6 $ 222.2
Short-term investments . . . . . . . . . . . . 45.0 207.2
Accounts receivable, less allowances:
1994, $57.5; 1993, $44.9 . . . . . . . . . . 627.9 687.1
Inventories. . . . . . . . . . . . . . . . . . 466.3 404.6
Prepaid expenses, deferred income taxes
and other current assets . . . . . . . . . . . 484.3 379.4
Total current assets . . . . . . . . . . . . . 1,739.1 1,900.5
Property, at cost:
Land . . . . . . . . . . . . . . . . . . . . . 46.1 47.1
Buildings and improvements . . . . . . . . . . 1,450.4 1,319.8
Equipment. . . . . . . . . . . . . . . . . . . 1,283.7 1,146.6
Construction in progress . . . . . . . . . . . 269.5 325.4
Total. . . . . . . . . . . . . . . . . . . . . 3,049.7 2,838.9
Less accumulated depreciation. . . . . . . . . 967.4 871.2
Property, net. . . . . . . . . . . . . . . . . 2,082.3 1,967.7
Intangible Assets, net. . . . . . . . . . . . . . . 168.3 182.5
Other Assets. . . . . . . . . . . . . . . . . . . . 336.0 266.2
$4,325.7 $4,316.9
/TABLE
1994 1993
LIABILITIES AND SHAREHOLDERS' EQUITY
___________________________________________________________________________
Current Liabilities:
Accounts payable . . . . . . . . . . . . . . . $ 285.2 $ 249.0
Short-term borrowings and current portion of
long-term debt . . . . . . . . . . . . . . . 782.3 1,076.0
U.S., foreign and state income taxes . . . . . 397.7 341.8
Accrued compensation . . . . . . . . . . . . . 170.5 157.4
Other accrued liabilities. . . . . . . . . . . 393.1 308.2
Total current liabilities. . . . . . . . . . . 2,028.8 2,132.4
Long-Term Liabilities:
Long-term debt . . . . . . . . . . . . . . . . 185.8 182.3
Deferred income taxes. . . . . . . . . . . . . 246.1 175.9
Other long-term liabilities. . . . . . . . . . 290.6 244.4
Total long-term liabilities. . . . . . . . . . 722.5 602.6
Shareholders' Equity:
Preferred shares - authorized, 50,000,000
shares of $1 par value each; issued - none . - -
Common shares - authorized, 300,000,000 shares
of $1 par value each; issued,
251,482,691 shares . . . . . . . . . . . . . 251.5 251.5
Paid-in capital . . . . . . . . . . . . . . . . 133.3 80.9
Retained earnings . . . . . . . . . . . . . . . 3,978.2 3,435.6
Foreign currency translation adjustment and other (117.0) (116.2)
Total . . . . . . . . . . . . . . . . . . . . . 4,246.0 3,651.8
Less treasury shares, at cost - 1994, 65,468,430
shares; 1993, 57,927,994 shares . . . . . . 2,671.6 2,069.9
Total shareholders' equity . . . . . . . . . . 1,574.4 1,581.9
$4,325.7 $4,316.9
<FN>
See Notes to Consolidated Financial Statements.
Notes to Consolidated Financial Statements
(Dollars in millions, except per share figures)
Accounting Policies
Principles of Consolidation
The consolidated financial statements include Schering-Plough Corporation and
its subsidiaries. Intercompany balances and transactions are eliminated.
Certain
prior year amounts have been reclassified to conform to the current year
presentation.
Cash and Cash Equivalents
Cash and cash equivalents include operating cash and highly liquid investments,
generally with maturities of three months or less.
Investments
Effective January 1, 1994, the Company adopted Statement of Financial
Accounting Standards (SFAS) No. 115, "Accounting for Certain Investments in
Debt and Equity Securities." The Company's short-term investments consist of
short-term certificates of deposit and municipal obligations, which
are generally
held to maturity. The Company's other investments consist primarily of debt
and equity securities held in non-qualified trusts for pension
obligations. These
trust funds are included in other non-current assets on the consolidated balance
sheet. For purposes of SFAS No. 115, all of the Company's investment
securities are classified as available for sale and, accordingly,
are carried at fair
value. Unrealized gains and losses are included in shareholders' equity until
realized. There was no effect on income as a result of adopting SFAS No. 115.
Inventories
Inventories are valued at the lower of cost or market. Cost is determined by
using the last-in, first-out method for substantially all domestic
inventories. The
cost of all other inventories is determined by the first-in, first-out method.
Depreciation
Depreciation is provided over the estimated useful lives of the properties,
generally by use of the straight-line method. Average useful lives are 50 years
for buildings, 25 years for building improvements and 12 years for equipment.
Intangible Assets
Intangible assets principally include goodwill, patents, licenses
and trademarks.
Net goodwill of $69.3 and $70.7 at December 31, 1994 and 1993,
respectively, represents the excess of cost over the fair value of net assets of
companies purchased and is amortized on the straight-line method, generally
over 40 years. Other intangible assets are recorded at cost and amortized over
their expected useful lives on the straight-line method. Accumulated
amortization of intangible assets was $101.4 and $86.5 at December 31, 1994
and 1993, respectively. Intangible assets are periodically reviewed
to determine
recoverability by comparing their carrying values to expected future cash flows.
Foreign Currency Translation
The net assets of most of the Company's foreign subsidiaries are translated into
U.S. dollars using current exchange rates. The U.S. dollar effects that arise
from translating the net assets of these subsidiaries at changing rates are
recorded in the foreign currency translation adjustment (FCTA) account in
shareholders' equity. For the remaining foreign subsidiaries, principally those
operating in highly inflationary economies, non-monetary assets are translated
using historical rates, while monetary assets are translated at current
rates, with
the U.S. dollar effects of rate changes included in income.
Exchange gains and losses arising from hedging foreign net investments and
from translating intercompany balances of a long-term investment nature are
recorded in the FCTA account. Other exchange gains and losses are included in
income.
Net foreign exchange losses included in income were $5.8, $13.6 and $21.5 in
1994, 1993 and 1992, respectively.
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 are either
not dilutive
or do not have a material effect on the determination of earnings per common
share.
Financial Instruments
The table below presents the carrying values and estimated fair values for the
Company's financial instruments, including derivative financial instruments.
Estimated fair values were determined based on market prices, where available,
or dealer quotes.
December 31, 1994 December 31, 1993
Carrying Estimated Carrying Estimated
Value Fair Value Value Fair Value
Assets:
Cash and cash equivalents $ 116 $ 116 $ 222 $ 222
Short-term investments 45 45 207 207
Other investments 83 83 87 90
Derivative Financial Instruments:
Foreign currency put options 1 - 4 6
Forward exchange contracts 2 2 - -
Liabilities:
Short-term borrowings 782 782 1,076 1,076
Long-term debt 186 189 182 194
Derivative Financial Instruments:
Interest rate swap contracts 19 19 6 6
Foreign currency swap
contracts 69 101 53 68
Credit and Market Risk
Most financial instruments expose the holder to credit risk for non-performance
and to market risk for changes in interest and currency rates. The Company
mitigates credit risk by dealing only with financially sound counterparties.
Accordingly, the Company does not anticipate loss for non-performance. The
Company manages market risk primarily by investing in short-term, highly liquid
investments and, in the case of derivatives, by limiting the use of
derivatives to
hedging activities or by limiting potential exposure to amounts that are not
material to results of operations or cash flow. The Company does not enter into
derivative instruments to generate trading profits.
Short-term and Other Investments
Short-term investments consist of certificates of deposit and municipal
obligations, all of which mature within 12 months. Other investments primarily
consist of debt and equity securities held in non-qualified trusts to
fund pension
benefits. Other investments are recorded in other non-current assets. Gains
and losses during 1994 and 1993, based on the specific identification method,
were not material.
Derivatives
The Company has not used derivative financial instruments to manage overall
interest rate risk or overall exchange rate risk. Further, the Company has not
used derivative financial instruments to speculate. The use of derivative
financial instruments has been limited to:
o Hedging selective foreign exchange exposures that arise from
international operations and
o International cash management.
Hedging Selective Foreign Exchange Exposures
The profitability of the Company's foreign operations, as measured in U.S.
dollars, is subject to exchange rate risk. If the U.S. dollar weakens, the
profitability of foreign operations benefits. However, if the U.S. dollar
strengthens, the profitability of foreign operations can be adversely affected.
Historically, the level of pre-tax operating profitability subject to this
kind of
exchange risk has been as follows:
1994 1993 1992
Europe, Middle East and Africa $232 $220 $215
Latin America 102 79 65
Canada, Pacific Area and Asia 138 207 141
To date, management has not deemed it cost-effective to engage in a formula-
based program of hedging the profitability of these operations using derivative
financial instruments. Some of the reasons for this conclusion are:
o The Company operates in a large number of foreign countries; the
currencies of these countries generally do not move in the same
direction
at the same time.
o Historically, the major groups of currencies in which the
Company operates
generally have not experienced dramatic changes on a year-to-year basis.
o The Company's foreign subsidiaries purchase significant quantities of
inventory payable in U.S. dollars. Managing the level of
inventory and
related payables and the rate of inventory turnover provides a level of
protection against adverse changes in exchange rates.
Anticipated Inventory Purchases
On a selective basis, derivative instruments have been used to hedge some of
the anticipated inventory purchases of Company subsidiaries.
Put option contracts provide the right to sell a fixed amount of a specified
currency at a fixed price during a specified period. Realized gains on these
contracts are accounted for as a reduction in the cost of inventory. Unrealized
gains are not recognized for financial statement purposes. Losses on foreign
currency put options are limited to the premiums paid. Premiums paid are
recorded in other current and non-current assets and amortized to other
expense, net over the life of the contract. At December 31, 1994, yen option
contracts were outstanding, which provide the Company with
the right to deliver 6.2
billion yen in exchange for $60 in 1995. There were no unrealized gains at
December 31, 1994.
At December 31, 1993, the Company held options to deliver 85 million
Deutschemarks, 238 million French francs and 6.7 billion yen for $50, $40 and
$60, respectively. All 1993 contracts matured in 1994. At December 31,
1993, unrealized gains were insignificant. Gains and costs in both 1994 and
1993 were not material.
Firm Commitments
On a selective basis, the Company will enter into forward exchange contracts to
hedge near-term, firm commitments denominated in a foreign currency. At
December 31, 1994, the Company's Mexican subsidiary held a forward contract
with a notional principal of $7 and a maturity date of January 24, 1995. Under
the contract, on January 24, the subsidiary received pesos equal to the
difference between the spot rate and the contract rate of 3.28 times the
notional principal. The market and net carrying value of this contract at
December 31, 1994, was an asset of $2. Realized and unrealized gains and
losses under this contract are recorded as foreign exchange gains and losses and
offset the equivalent recorded loss or gain on the firm commitment.
At December 31, 1993, the Mexican subsidiary held a forward contract with a
notional principal of $7 and a contract rate of 3.12. This contract matured in
January 1994.
Net Investment in Foreign Subsidiaries
In the early 1980s, the Company significantly changed its operating structure in
Japan. About the same time, the Company decided to partially hedge its net
investment in Japan. At December 31, 1994, the net investment in the
subsidiary was approximately 20 billion yen.
Long-term foreign currency interest rate swap contracts have been used to
hedge this net investment. Under contracts outstanding at December 31, 1994
and 1993, the Company will deliver 14.9 billion yen in exchange for $80.3 on
various dates through 2005. The net contract liability is in other long-term
liabilities. There have been no purchases, sales or maturities of these foreign
currency contracts during 1994. In accordance with SFAS No. 52, the foreign
currency obligations under these contracts are recorded using foreign exchange
spot rates in effect at year end. At December 31, 1994, the Company
estimates that a 1 percent change in the yen to U.S. dollar exchange rate would
affect the estimated fair value of these contracts by approximately $2.
The investment in the Japanese subsidiary is the only net investment that is
hedged at year end using derivative financial instruments.
International Cash Management
In 1991 and 1992, the Company utilized interest rate swaps as part of its
international cash management strategy. The Company employed the strategy
in 1991 using an interest rate swap arrangement with a notional principal of
$650 and in 1992 using an interest rate swap arrangement with a notional
principal of $950.
The $650 arrangement initially provided for the payment and receipt of interest
based on two floating rates (LIBOR and average federal funds rates), and the
$950 arrangement initially provided for the payment of interest based upon a
floating rate (LIBOR) and the receipt of interest based upon two-year U.S.
treasury rates. Both arrangements have 20-year terms.
During 1994, the market risk of the $650 arrangement was significantly reduced
by entering into offsetting contracts. The offsetting interest receipts and
payments begin in 1997. As a result, the Company continues to be subject to
market risk through 1996. At December 31, 1994 and 1993, the market value
of this arrangement was a liability of $19 and $6, respectively.
It is estimated
that a 50 basis point change in interest rate structure could change the market
value of this arrangement by approximately $5.
During 1993, the market risk of the $950 arrangement was effectively nullified
by entering into offsetting contracts. These offsetting contracts took effect
immediately. The market value of this arrangement was a liability of less than
$1 at December 31, 1994 and 1993.
The above interest rate swaps are accounted for on a mark-to-market basis,
and
annual net cash flows for payments and receipts under the contracts are not
material.
Borrowings
Short-term borrowings consist of commercial paper issued in the United States,
bank loans and notes payable. Commercial paper outstanding at December 31,
1994 and 1993 was $601.7 and $961.4, respectively. Bank loans and notes
payable at December 31, 1994 and 1993 totaled $178.2 and $112.0,
respectively. The weighted average interest rate for short-term borrowings at
December 31, 1994 and 1993 was 6.4 percent and 3.6 percent, respectively.
At December 31, 1994, unused domestic bank lines of credit, which were
considered as support for commercial paper borrowings, were $541.5. These
lines of credit do not require compensating balances; however, a nominal
commitment fee is paid for these lines.
The Company's foreign subsidiaries had available $325.1 in unused lines of
credit from various financial institutions at December 31, 1994. Generally,
these credit lines do not require commitment fees or compensating balances and
are cancelable at the option of the Company or the financial institutions.
Long-term debt, including current maturities, at December 31
consisted of the following:
1994 1993
Notes, 7.8%, due 1996 . . . . . . . . . . . . . . $100.0 $100.0
Industrial revenue bonds, 4.35%-12.0%,
due 2001-2013 . . . . . . . . . . . . . . . . . 80.0 80.0
Other . . . . . . . . . . . . . . . . . . . . . . 8.2 4.9
188.2 184.9
Current maturities. . . . . . . . . . . . . . . . (2.4) (2.6)
Total long-term debt. . . . . . . . . . . . . . . $185.8 $182.3
During 1992, the Company purchased approximately $600.0 of U.S.
government securities and deposited them into an irrevocable trust to complete
an in-substance defeasance of the Company's zero-coupon notes. The funds in
the trust will be used solely to satisfy the $828.6 maturity value of the zero-
coupon notes due December 2, 1996. Accordingly, the government securities
and the zero-coupon notes have been excluded from the 1994 and 1993
balance sheets. The debt extinguishment resulted in an extraordinary loss in
1992 of $26.7 (net of income taxes of $15.0), or $.13 per share.
The Company has a shelf registration statement on file with the Securities and
Exchange Commission covering the issuance of up to $200.0 of debt securities.
These securities may be offered from time to time on terms to be determined at
the time of sale. As of December 31, 1994, no debt securities have been
issued pursuant to this registration.
Interest Income and Interest Expense
Interest income for 1994, 1993 and 1992 was $17.2, $23.9 and $38.5,
respectively.
Interest expense, net of amounts capitalized as part of the construction cost of
property, plant and equipment, for 1994, 1993 and 1992 was $56.2, $48.2
and $55.4, respectively. Interest costs of $11.4, $12.7 and $15.8 in 1994,
1993 and 1992, respectively, have been capitalized and included in the cost of
property, plant and equipment. Total cash payments for interest, net of
amounts capitalized, were $43.8, $49.4 and $54.8 in 1994, 1993 and 1992,
respectively.
Interest income and interest expense are included in other expense, net.
Inventories
Year-end inventories consisted of the following:
1994 1993
Finished products . . . . . . . . . . . . . . $180.1 $168.3
Goods in process. . . . . . . . . . . . . . . 193.8 153.7
Raw materials and supplies. . . . . . . . . . 92.4 82.6
Total inventories . . . . . . . . . . . . . . $466.3 $404.6
Inventories valued on a last-in, first-out basis comprised approximately 36
percent and 42 percent of total inventories at December 31, 1994 and 1993,
respectively. The estimated replacement cost of total inventories at December
31, 1994 and 1993 was $520.1 and $458.7, respectively.
Stock Incentive Plans
Under the terms of the Company's 1992 Stock Incentive Plan, 9 million of the
Company's common shares may be granted as stock options or awarded as
deferred stock units to officers and certain employees of the Company through
December 1997. Options are granted at prices not less than the market value of
the common shares at grant dates, become exercisable not earlier than six
months and one day from the date of the grant, and expire not later than 10
years after the date of the grant. Deferred stock units are payable in an
equivalent number of common shares; the shares are distributable in a single
installment or in up to five equal annual installments commencing not earlier
than six months and one day from the date of the award.
The table below summarizes stock option activity over the past two years under
current and prior plans:
Number Option price
of shares (range per share)
Outstanding at January 1, 1993. . . . . 4,571,226 $ 8.81-$58.88
Granted . . . . . . . . . . . . . . 608,195 $53.00-$66.38
Exercised . . . . . . . . . . . . . (772,910) $ 8.81-$58.88
Canceled or expired . . . . . . . . (26,105)
Outstanding at December 31,1993 . . . . 4,380,406 $ 8.81-$66.38
Granted . . . . . . . . . . . . . . 1,303,583 $59.63-$74.13
Exercised . . . . . . . . . . . . . (755,687) $ 8.81-$58.88
Canceled or expired . . . . . . . . (101,335)
Outstanding at December 31, 1994. . . . 4,826,967 $ 9.88-$74.13
Exercisable at December 31, 1994. . . . 2,728,359
/TABLE
As of December 31, 1994 and 1993, there were 771,460 and 942,300
deferred stock units outstanding, respectively, under current and prior plans.
There were 507,386 shares issued in 1994 and 315,770 shares issued in 1993.
At December 31, 1994, there were 6,413,723 common shares available for
future options or awards.
Retirement Plans
The Company and certain of its subsidiaries have defined benefit pension plans
covering eligible employees in the United States and certain foreign countries.
Benefits under these plans are generally based upon the participants' average
final earnings and years of credited service, and take into account governmental
retirement benefits. The Company's funding policy is to contribute actuarially
determined amounts, after taking into consideration the funded status of each
plan and regulatory limitations.
The components of the net pension expense (income) for all Company-
sponsored plans were as follows:
1994 1993 1992
Service cost - benefits earned during
the year. . . . . . . . . . . . . . . $ 33.0 $ 26.6 $ 24.0
Interest cost on projected benefit
obligations . . . . . . . . . . . . . 42.2 40.5 37.5
Actual return on plan assets . . . . . .2 (101.5) (46.3)
Net amortization and deferral . . . . . (69.9) 36.8 (15.3)
Net pension expense (income). . . . . . $ 5.5 $ 2.4 $ (.1)
The year-to-year changes in the net amortization and deferral component of
pension cost are principally attributable to differences between actual and
expected returns on plan assets.
The actuarial present value of benefit obligations and qualified assets of the
plans at December 31 were as follows:
Over funded Under funded
plans plans
1994 1993 1994 1993
Projected benefit obligations:
Accumulated benefit obligations,
including vested benefits of
$449.2 in 1994 and $466.8 in 1993. . . $426.4 $442.9 $73.0 $ 61.2
Effect of future salary increases . . . 70.2 82.8 20.5 19.0
Total projected benefit obligations . . . 496.6 525.7 93.5 80.2
Plan assets at fair value,
primarily stocks and bonds. . . . . . . 688.7 699.8 13.7 11.4
Plan assets over (under) projected
benefit obligations . . . . . . . . . . 192.1 174.1 (79.8) (68.8)
Unrecognized net transition (asset)
liability . . . . . . . . . . . . . . . (86.6) (95.7) 6.6 7.8
Unrecognized prior service cost . . . . . 6.0 6.3 8.7 4.7
Unrecognized net (gain) loss. . . . . . . (10.3) 1.8 15.3 18.2
Net pension asset (liability) . . . . . . $101.2 $ 86.5 $(49.2) $(38.1)
In addition to the plan assets indicated above, at December 31, 1994 and 1993,
$45.7 and $45.4, respectively, of securities were held in non-qualified trusts
designated to provide pension benefits for certain of the plans presented above
as under funded.
The discount rate used in determining the projected benefit obligation for the
Company's U.S. plans was 8.25 percent at December 31, 1994, and 7 percent
at December 31, 1993. The weighted-average discount rate for the Company's
non-U.S. plans was 7.4 percent at December 31, 1994, and 7.3 percent at
December 31, 1993. The weighted-average rate of increase in future
compensation levels for all plans was 4.2 percent at December 31, 1994 and
1993. The weighted-average expected long-term rate of return on plan assets
was approximately 10 percent for both years. The 1994 assumption changes
reduced the total projected benefit obligation by approximately 11 percent.
The Company has a defined contribution profit-sharing plan covering
substantially all of its full-time domestic employees who have completed one
year of service. The annual contribution is determined by a formula based on
the Company's income, shareholders' equity and participants' compensation.
Profit-sharing expense totaled $59.6, $58.2 and $53.7 in 1994, 1993 and
1992, respectively.
Other Post-retirement Benefits
The Company provides post-retirement health care and other benefits to its
eligible United States retirees and their dependents. Eligibility for benefits
depends upon age and years of service. Retirees share in the cost of the health
care benefits.
Health care benefits for retirees in most countries other than the United States
are provided through local government-sponsored plans. The direct cost of
Company-sponsored, non-U.S. plans is not significant. Accordingly, these plans
are excluded from the following disclosures.
Effective January 1, 1993, the Company adopted SFAS No. 106, "Employers'
Accounting for Postretirement Benefits Other Than Pensions." SFAS No. 106
requires the accrual of post-retirement benefits during the years an employee
provides service to the Company. Previously, these costs were expensed on a
pay-as-you-go basis. As of January 1, 1993, the cumulative accrual of such
benefits totaled $147.0, $94.2 after-tax, or $.48 per share. The Company
elected to recognize this entire amount effective with the adoption of SFAS No.
106.
The components of net post-retirement benefit cost were as follows:
1994 1993
Service cost - benefits earned during the year. . . $ 6.0 $ 5.3
Interest cost on accumulated post-retirement
benefit obligation . . . . . . . . . . . . . . . . 10.3 12.1
Actual return on plan assets. . . . . . . . . . . . 2.0 (15.9)
Net deferral. . . . . . . . . . . . . . . . . . . . (15.5) 4.2
Post-retirement benefit cost. . . . . . . . . . . . $ 2.8 $ 5.7
The pay-as-you-go cost was $6.1 in 1992.
The accumulated post-retirement benefit obligation and funded status at
December 31 were as follows:
1994 1993
Accumulated post-retirement benefit
obligation attributable to:
Retirees. . . . . . . . . . . . . . . . . . . . . $67.6 $ 69.6
Fully eligible active plan participants . . . . . 24.6 24.2
Other active plan participants. . . . . . . . . . 38.2 56.2
Accumulated post-retirement benefit obligation . . . 130.4 150.0
Plan assets at fair value,
primarily stocks and bonds. . . . . . . . . . . . . 150.2 157.6
Plan assets in excess of accumulated post-retirement
benefit obligation . . . . . . . . . . . . . . . . 19.8 7.6
Unrecognized net gain . . . . . . . . . . . . . . . . (27.6) (12.3)
Accrued post-retirement benefit liability . . . . . . $(7.8) $ (4.7)
In January 1993, the Company fully funded its initial accumulated benefit
obligation. Future funding is at the discretion of the Company.
The assumed health care cost trend rates used for measurement purposes were
10.6 percent for 1995, trending down to 5 percent by 2003. The weighted-
average discount rate used was 8.25 percent at December 31, 1994, and 7
percent at December 31, 1993. The weighted-average expected long-term rate
of return on plan assets was 9 percent at both December 31, 1994 and 1993.
The 1994 discount rate change reduced the accumulated benefit obligation by
approximately 18 percent. Earnings on
plan assets that have been segregated for tax
purposes and funded through a Voluntary Employee Benefit Association (VEBA
trust) are subject to a tax rate of 39.6 percent.
At December 31, 1994, a 1 percent increase in the assumed health care cost
trend rate would increase the combined service and interest cost by
approximately 18 percent and the accumulated post-retirement benefit obligation
by approximately 12 percent.
Shareholders' Equity
The Company has Preferred Share Purchase Rights (the "Rights") outstanding
that are attached to, and presently only trade with, the Company's common
shares and are not exercisable. The Rights will begin to trade separately from
the common shares and become exercisable upon the earlier of (i) 10 days
following a public announcement that a person or group has acquired beneficial
ownership of 20 percent or more of the Company's outstanding common
shares, or (ii) 10 business days following a person or group's commencement
of, or announcement of, an intention to make a tender or exchange offer, the
consummation of which would result in beneficial ownership of 20 percent or
more of the Company's common shares.
Upon becoming exercisable, each Right will entitle the holder to purchase one
two-hundredths of a share of Series A Junior Participating Preferred Stock, par
value $1 per share, of the Company at an exercise price of $125. In the event
that the Company is acquired pursuant to a merger, or 50 percent or more of its
consolidated assets or earning power are sold, each Right will
entitle its holder
to purchase shares of the acquiring company having a market value of twice the
exercise price of the Right. In the event that any person or group becomes the
beneficial owner of 20 percent or more of the common shares, each Right will
entitle its holder to purchase common shares of the Company having a market
value of twice the exercise price of the Right. The Company may redeem the
Rights at $.005 per Right at any time prior to the acquisition, by a person or
group, of 20 percent or more of the Company's outstanding common shares.
The Rights will expire on August 9, 1999, unless earlier redeemed.
A summary of activity in common shares, paid-in capital and treasury shares
follows (number of shares in thousands):
Common Paid-in Treasury Shares
Shares Capital Number Amount
Balance at January 1, 1992. . . $251.5 $20.8 49,694 $1,487.4
Shares issued under stock
incentive plans . . . . . . . - 26.7 (791) (2.8)
Purchase of treasury shares. . - - 3,062 171.0
__________________________________________________________________
Balance at December 31, 1992. . 251.5 47.5 51,965 1,655.6
Shares issued under stock
incentive plans . . . . . . . - 41.8 (990) (4.0)
Warrant transactions. . . . . - (8.4) - -
Purchase of treasury shares . - - 6,953 418.3
____________________________________________________________________
Balance at December 31, 1993. . 251.5 80.9 57,928 2,069.9
Shares issued under stock
incentive plans . . . . . . . - 52.4 (1,054) 2.3
Purchase of treasury shares . - - 8,594 599.4
____________________________________________________________________
Balance at December 31, 1994. . $251.5 $133.3 65,468 $2,671.6
At December 31, 1994, warrants to purchase 7.6 million common shares,
exercisable in 1996, are effectively outstanding; 5.1 million warrants have a
strike price of $90 per share and 2.5 million warrants have a strike price of
$97.33 per share.
Income Taxes
Effective January 1, 1992, the Company adopted SFAS No. 109, "Accounting
for Income Taxes," under which deferred taxes are based on the asset and
liability method. Prior to the adoption of SFAS No. 109, income taxes were
accounted for under the deferral method.
The cumulative effect of implementing SFAS No. 109 was a one-time gain of
$27.1, or $.13 per share.
U.S. and foreign operations contributed to income before income taxes as
follows:
1994 1993 1992
United States. . . . . . . . . . . . . $ 756.8 $ 588.7 $561.7
Foreign. . . . . . . . . . . . . . . . 456.4 489.7 392.2
Total income before income taxes . . . $1,213.2 $1,078.4 $953.9
The components of income tax expense before the extraordinary item and
cumulative effect of accounting changes were as follows:
1994 1993 1992
Current:
Federal. . . . . . . . . . . . . . . $ 91.3 $110.9 $131.5
Foreign. . . . . . . . . . . . . . . 119.2 121.7 111.5
State. . . . . . . . . . . . . . . . 19.6 6.9 24.3
Total current. . . . . . . . . . . . 230.1 239.5 267.3
Deferred:
Federal and state. . . . . . . . . . 71.7 10.4 6.1
Foreign. . . . . . . . . . . . . . . (10.6) 3.5 (39.5)
Total deferred . . . . . . . . . . . 61.1 13.9 (33.4)
Total income tax expense . . . . . . . $291.2 $253.4 $233.9
Deferred taxes include provisions (credits) for the following:
1994 1993 1992
Non-recurring items . . . . . . . . . . $ 10.7 $ 5.7 $ 13.5
Excess of tax depreciation over
financial statement depreciation . . . 29.8 17.2 .8
General business credit carry-forwards. 21.0 (7.0) (2.6)
Intercompany inventory transfers . . . (18.0) 2.6 (17.4)
Operating costs not currently
deductible for tax purposes* . . . . (22.7) (11.1) (15.3)
* Principally consisting of accruals for employee benefits and other operating
costs and allowances for accounts receivable and inventory.
The difference between the U.S. statutory tax rate and the Company's effective
tax rate was due to the following:
1994 1993 1992
U.S. statutory tax rate. . . . . . . . . 35.0% 35.0% 34.0%
Increase (decrease) in taxes resulting
from:
Tax exemptions on Puerto Rico
operations . . . . . . . . . . . . . (6.5) (6.1) (6.8)
Difference in effective tax rate on
foreign source income. . . . . . . . (3.8) (5.6) (5.7)
Research tax credit. . . . . . . . . . (.6) (.6) (.3)
All other, net . . . . . . . . . . . . (.1) .8 3.3
Effective tax rate . . . . . . . . . . . 24.0% 23.5% 24.5%
As of December 31, 1994 and 1993, the Company had total deferred tax assets
of $340.7 and $325.9, respectively, and deferred tax liabilities of $370.3 and
$301.4, respectively. Valuation allowances are not significant. Significant
deferred tax liabilities at December 31, 1994 and 1993 were for depreciation
differences, $193.2 and $163.5, respectively, and retirement plans, $34.0 and
$27.4, respectively. Significant deferred tax assets at December 31, 1994 and
1993 were for operating costs not currently deductible for tax purposes, $245.6
and $222.9, respectively. Current assets at December 31, 1994 and 1993
include net deferred tax assets of $209.3 and $187.6, respectively.
Deferred taxes are not provided on undistributed earnings of foreign
subsidiaries
(considered to be permanent investments), which at December 31, 1994,
approximated $1,380.0. Determining the tax liability that would arise if these
earnings were remitted is not practicable.
The Company has facilities in Puerto Rico that manufacture products for both
domestic and foreign markets. These facilities operate under tax relief
and other
incentives that expire at various dates through 2018.
As of December 31, 1994, the U.S. Internal Revenue Service has completed its
examination of the Company's tax returns for all years through 1986 and there
are no unresolved issues outstanding for those years.
Total income tax payments during 1994, 1993 and 1992 were $173.1, $183.1
and $210.3, respectively.
At December 31, 1994, the Company had capital loss carry-forwards for tax
purposes of $18.8 that expire in 1995.
Commitments
Total rent expense amounted to $28.9 in 1994, $27.0 in 1993 and $25.6 in
1992. Future minimum rental commitments on non-cancelable operating leases
as of December 31, 1994, range from $22.8 in 1995 to $8.1 in 1999, with
aggregate minimum lease obligations of $26.7 due thereafter.
The Company has commitments related to future capital expenditures
totaling $58.3 as of December 31, 1994.
Legal and Environmental Matters
The Company has responsibilities for environmental safety and clean-up under
various state, local and federal laws, including the Comprehensive Environmental
Response, Compensation and Liability Act, commonly known as Superfund. The
Company is named as a potentially responsible party (PRP) at several Superfund
sites. The Company estimates its obligations for clean-up costs for Superfund
sites based on information obtained from the Environmental Protection Agency
and/or studies prepared by independent engineers, and on the probable costs to
be paid by other PRPs. The Company records a liability for environmental
assessments and/or clean-up when it is probable a loss has been incurred.
The Company is also involved in various other claims and legal proceedings of a
nature considered normal to its business, including product
liability cases. The
estimated costs the Company expects to pay in these cases are accrued when
the liability is considered probable and the amount can reasonably be
estimated.
The recorded liabilities for the above matters at December 31, 1994 and 1993,
and the related expenses incurred during the three years ended December 31,
1994, were not material. Expected insurance recoveries have not been
considered in determining the costs related to recorded liabilities. Management
believes that, except for the matters discussed in the following two paragraphs,
it is remote that any material liability in excess of the amounts
accrued will be
incurred.
In 1994, a judgment in the amount of $63.6, including $57.5 in punitive
damages, was entered against the Company in state court in Portland, Oregon,
in connection with a product liability lawsuit involving THEO-DUR. An appeal
from this judgment has been taken. While the success of the appeal cannot be
predicted with certainty, the Company will vigorously pursue its case through
the appellate courts. The Company believes it has insurance coverage for
amounts in excess of a $3 self-insured retention, but the
insurance carriers have
reserved their rights with respect to liability for punitive damages.
The Company is a defendant in more than 100 antitrust actions commenced in
state and federal courts by independent and chain retail pharmacies and others.
The plaintiffs allege price discrimination and/or conspiracy between the
Company and other defendants to restrain trade by jointly refusing to sell
prescription drugs at discounted prices to the plaintiffs.
One of these cases is a
class action on behalf of U.S. retail pharmacies. Plaintiffs seek treble
damages
in an unspecified amount and an injunction against the allegedly unlawful
conduct. The Company believes that all these actions are without merit and is
defending itself vigorously against all such claims.
Consistent with trends in the pharmaceutical industry, the Company is self-
insured for certain events.
Business Segment Data
Schering-Plough Corporation is a holding company whose subsidiaries are
engaged in the discovery, development, manufacturing and marketing of
pharmaceutical and health care products worldwide. Pharmaceutical products
include prescription drugs, vision care and animal health products. Health care
products include over-the-counter, foot care and sun care products
sold primarily
in the United States.
Sales and Operating Profit by Industry Segment
Sales Profit
1994 1993 1992 1994 1993 1992
Pharmaceutical products. . . $4,000.7 $3,640.7 $3,359.5 $1,190.8 $1,055.9 $ 934.6
Health care products . . . . 656.4 700.6 696.2 158.9 135.8 149.8
Total sales and operating
profit. . . . . . . . . . . 4,657.1 4,341.3 4,055.7 1,349.7 1,191.7 1,084.4
General corporate
revenue and expense . . . . (80.3) (65.1) (75.1)
Interest expense . . . . . . (56.2) (48.2) (55.4)
Consolidated sales
and pre-tax profit. . . . . $4,657.1 $4,341.3 $4,055.7 $1,213.2 $1,078.4 $953.9
Identifiable Assets, Capital Expenditures, Depreciation and Amortization by Industry
Segment
Capital Depreciation and
Assets Expenditures Amortization
1994 1993 1992 1994 1993 1992 1994 1993 1992
Pharmaceutical products. $3,544.5 $3,276.1 $3,036.8 $247.2 $339.4 $383.9 $134.2 $119.5 $113.0
Health care products . . 395.2 408.7 382.7 21.5 24.2 18.4 18.2 17.8 16.9
Industry segment totals. 3,939.7 3,684.8 3,419.5 268.7 363.6 402.3 152.4 137.3 129.9
Corporate. . . . . . . . 386.0 632.1 737.1 2.9 1.6 .9 5.2 5.1 5.1
Consolidated assets,
capital expenditures,
depreciation and
amortization. . . . . . $4,325.7 $4,316.9 $4,156.6 $271.6 $365.2 $403.2 $157.6 $142.4 $135.0
Sales, Operating Profit and Identifiable Assets by Geographic Area
Sales Profit Assets
1994 1993 1992 1994 1993 1992 1994 1993 1992
United States. . . $2,552.6 $2,285.1 $2,163.9 $ 878.4 $ 685.2 $ 664.2 $2,344.2 $2,263.0 $2,135.3
Europe, Middle
East and Africa . 1,064.5 955.5 1,018.9 232.0 219.8 214.5 887.5 689.2 567.6
Latin America. . . 394.0 333.1 274.7 101.7 79.4 64.6 278.4 233.9 192.0
Canada, Pacific
Area and Asia . . 646.0 767.6 598.2 137.6 207.3 141.1 429.6 498.7 524.6
Total sales,
operating profit
and identifiable
assets . . . . . $4,657.1 $4,341.3 $4,055.7 $1,349.7 $1,191.7 $1,084.4 $3,939.7 $3,684.8 $3,419.5
/TABLE
Sales, operating profit and identifiable assets as presented are associated with
each geographic area, based on the location of the ultimate customers. The
Company maintains manufacturing facilities in Ireland and Puerto Rico for the
production of several significant finished and semi-finished products
for distri-
bution to domestic and foreign subsidiaries. The sales, operating profit and
identifiable assets of these facilities have been included in the
geographic area in
which the ultimate customers are located.
Net assets of foreign subsidiaries totaled $1,611.7, $1,571.5 and $1,322.4 at
December 31, 1994, 1993 and 1992, respectively.
Report by Management
The management of Schering-Plough is responsible for the preparation and the
integrity of all information and representations contained in the financial
statements and related data included in this Annual Report. This information
was prepared in accordance with generally accepted accounting principles and is
believed by management to present fairly the Company's results of operations,
financial position and cash flows. It is important to recognize that the
preparation of financial statements requires the use of estimates and
assumptions that affect the reported amounts of assets, liabilities, sales and
expenses.
Schering-Plough maintains, and management relies on, a system of internal
accounting controls that provides reasonable assurance of the integrity and
reliability of the financial statements. The system provides, at
appropriate cost,
that assets are safeguarded, transactions are executed in accordance with
management's authorization, and fraudulent financial reporting practices are
prevented or detected. In establishing and maintaining this system, judgments
are required to assess and balance the relative cost versus the expected benefit
of a given control.
The Company's internal accounting control system is clearly documented,
provides for careful selection and training of supervisory and management
personnel, and also requires appropriate segregation of responsibilities and
delegation of authority. Formal policies and procedures are maintained and
systematically disseminated throughout the Company. In addition, the Company
maintains a corporate code of conduct for purposes of determining possible
conflicts of interest, compliance with laws and confidentiality of proprietary
information.
The Company's independent auditors, Deloitte & Touche LLP, audit Schering-
Plough's consolidated financial statements. They evaluate the Company's
internal accounting controls and perform tests of procedures and accounting
records to enable them to render their report. In addition, Schering-Plough has
an internal audit function that assists management in discharging its
responsibilities. The internal audit staff, under the direction of the
vice president
- - corporate audits, regularly performs audits using programs designed to test
compliance with Company policies and procedures, and to verify the adequacy
of internal accounting controls and other financial policies. The
internal auditors
also continually evaluate the effectiveness and accuracy of financial
reporting by
the Company's various operations.
Management has considered the internal auditors' and independent auditors'
recommendations concerning the Company's system of internal accounting
controls and has taken appropriate action. Such recommendations are
communicated in accordance with Company policy to the individuals responsible
for implementation.
The Finance and Audit Committee of the Board of Directors consists solely of
non-employee directors. The Committee meets periodically with management,
the internal auditors and the independent auditors to review audit results,
financial reporting, internal accounting controls and other financial matters.
Both the independent auditors and internal auditors have free access to the
Committee, with and without the presence of management, to discuss the
adequacy of Schering-Plough's internal accounting controls, the quality of
financial reporting and other matters relating to their audits.
It is our opinion that the Company's system of internal accounting controls in
effect as of December 31, 1994, provides reasonable assurance that the
financial statements and related data in this Annual Report are fairly
presented in
accordance with generally accepted accounting principles.
/s/Robert P. Luciano /s/Harold R. Hiser, Jr. /s/Thomas H. Kelly
Chairman and Executive Vice President Vice President
Chief Executive Officer Finance and Controller
INDEPENDENT AUDITORS' REPORT
DELOITTE & TOUCHE LLP
Schering-Plough Corporation, its Directors and Shareholders:
We have audited the accompanying consolidated balance sheets of Schering-
Plough Corporation and subsidiaries as of December 31, 1994 and 1993 and the
related statements of consolidated income, retained earnings and cash flows for
each of the three years in the period ended December 31, 1994. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of Schering-Plough Corporation and
subsidiaries at December 31, 1994 and 1993 and the results of their operations
and their cash flows for each of the three years in the period ended December
31, 1994, in conformity with generally accepted accounting principles.
As discussed in Notes to Consolidated Financial Statements, the Company
changed, in 1992, its method of accounting for income taxes to conform with
Statement of Financial Accounting Standards (SFAS) No. 109, and, in 1993, its
method of accounting for post-retirement benefits other than pensions to
conform with SFAS No. 106.
/s/Deloitte & Touche LLP
Parsippany, New Jersey
February 15, 1995
COMMON SHARE DIVIDENDS AND MARKET DATA
During 1994, the Board of Directors increased the quarterly dividend rate from
$.45 per share to $.51 per share. Dividends paid on common shares in 1994
totaled $379.4 million, representing a 12 percent increase over the $339.6
million paid in 1993. The quarterly dividends per share paid over the last two
years were as follows:
Quarter 1994 1993
1st $ .45 $ .39
2nd .51 .45
3rd .51 .45
4th .51 .45
$ 1.98 $ 1.74
The approximate number of holders of record of common shares as of December 31,
1994, was 37,900.
The Company's common shares are listed and principally traded on the New York
Stock Exchange. The following table shows the reported high and
low sale prices for
the common shares in each of the calendar quarters during the past two years:
1994 1993
Quarter High Low High Low
1st $ 69 1/8 $ 55 5/8 $63 7/8 $51 3/4
2nd 66 5/8 55 1/8 70 7/8 55 1/2
3rd 71 3/8 61 5/8 69 1/4 58
4th 75 5/8 69 7/8 71 63 1/8
__________________________________________________________
Schering-Plough Corporation and Subsidiaries
Six-Year Selected Financial & Statistical Data
(Dollars in millions, except per share figures)
1994 1993 1992 1991 1990 1989
Operating Results
Sales . . . . . . . . . . . . . $4,657.1 $4,341.3 $4,055.7 $3,615.6 $3,322.9 $3,157.9
Income before income taxes. . . 1,213.2 1,078.4 953.9 860.8 768.9 645.6
Income before extraordinary item
and cumulative effect of
accounting changes . . . . . . 922.0 825.0 720.0 645.6 565.1 471.3
Extraordinary item. . . . . . . - - (26.7) - - -
Cumulative effect of accounting
changes. . . . . . . . . . . . - (94.2) 27.1 - - -
Net income. . . . . . . . . . . 922.0 730.8 720.4 645.6 565.1 471.3
Earnings per common share before
extraordinary item and cumulative
effect of accounting changes . 4.82 4.23 3.60 3.01 2.50 2.09
Extraordinary item. . . . . . . - - (.13) - - -
Cumulative effect of accounting
changes. . . . . . . . . . . . - (.48) .13 - - -
Earnings per common share . . . 4.82 3.75 3.60 3.01 2.50 2.09
_______________________________________________________________________________________________
Investments
Research and development. . . . $ 620.0 $ 577.6 $ 521.5 $ 425.9 $ 379.6 $ 326.5
Capital expenditures. . . . . . 271.6 365.2 403.2 339.4 242.9 186.1
Financial Condition
Property, net . . . . . . . . . $2,082.3 $1,967.7 $1,748.5 $1,490.4 $1,284.4 $1,210.7
Total assets. . . . . . . . . . 4,325.7 4,316.9 4,156.6 4,013.2 4,103.1 3,613.5
Long-term debt. . . . . . . . . 185.8 182.3 184.1 753.6 182.9 185.5
Shareholders' equity. . . . . . 1,574.4 1,581.9 1,596.9 1,346.1 2,080.8 1,955.4
Net book value per common share 8.46 8.17 8.00 6.67 9.37 8.64
Financial Statistics
Income before extraordinary item
and cumulative effect of accounting
changes as a percent of sales. 19.8% 19.0% 17.8% 17.9% 17.0% 14.9%
Net income as a percent of sales 19.8% 16.8% 17.8% 17.9% 17.0% 14.9%
Return on average shareholders'
equity . . . . . . . . . . . . 58.4% 46.0% 49.0% 37.7% 28.0% 25.9%
Effective tax rate. . . . . . . 24.0% 23.5% 24.5% 25.0% 26.5% 27.0%
Other Data
Cash dividends per common share $ 1.98 $ 1.74 $ 1.50 $ 1.27 $1.065 $ .875
Cash dividends on common shares 379.4 339.6 300.2 273.6 241.2 197.3
Depreciation and amortization . 157.6 142.4 135.0 129.0 121.9 111.9
Number of employees . . . . . . 21,200 21,600 21,100 20,200 19,700 21,300
Average common shares outstanding
(in millions) . . . . . . . . . 191.3 195.1 200.2 214.5 225.9 225.5
Actual common shares outstanding
at year end (in millions) . . . 186.0 193.6 199.5 201.8 222.0 226.3
Quarterly Results of Operations
(Dollars in millions, except per share figures)
Three Months Ended March 31, June 30, September 30, December 31,
1994 1993 1994 1993 1994 1993 1994 1993
Sales. . . . . . . . .$1,161.6 $1,089.6 $1,190.1 $1,123.4 $1,125.7 $1,061.9 $1,179.7 $1,066.4
Gross profit . . . . . 914.3 855.4 944.1 886.7 905.9 850.1 934.2 840.3
Income before income
taxes . . . . . . . . 333.1 292.1 316.8 278.8 295.1 260.6 268.2 246.9
Net income . . . . . . 253.2 129.3 240.7 213.2 224.3 199.4 203.8 188.9
Earnings per common
share . . . . . . . . 1.31 .65 1.25 1.09 1.17 1.03 1.09 .98
______________________________________________________________________________________________
The first quarter of 1993 includes a $94.2 charge ($.48 per share)
for the cumulative effect
of a change in accounting for post-retirement benefits other than pensions.
Page 1 OF 3
APPENDIX TO EXHIBIT #13
The first page of the financial section of the 1994 annual report to
shareholders
presents six bar charts. The following 6 sections provide the information
portrayed in the charts:
___________________________________________________________________________
Title: Earnings per Common Share*
* Before extraordinary item and accounting changes.
The horizontal axis is in dollars starting at $0.00, increasing in increments of
$1.00, ending at $5.00.
The vertical axis is in years starting with 1990, ending with 1994.
The data points are:
1990 $2.50
1991 $3.01
1992 $3.60
1993 $4.23
1994 $4.82
___________________________________________________________________________
Title: Income*
* Before extraordinary item and accounting changes.
The horizontal axis is in millions of dollars starting at zero,
increasing in $200
million increments, ending at $1,000 million.
The vertical axis is in years starting with 1990, ending with 1994.
The data points are:
1990 $565.1
1991 $645.6
1992 $720.0
1993 $825.0
1994 $922.0
___________________________________________________________________________
Page 2 of 3
APPENDIX TO EXHIBIT #13
___________________________________________________________________________
Title: Sales
The horizontal axis is in millions of dollars starting at zero,
increasing in $1,000
million increments, ending at $5,000 million.
The vertical axis is in years starting with 1990, ending with 1994.
The data points are:
1990 $3,322.9
1991 $3,615.6
1992 $4,055.7
1993 $4,341.3
1994 $4,657.1
___________________________________________________________________________
Title: Research and Development
The horizontal axis is in millions of dollars starting at zero, increasing
in $100
million increments, ending at $700 million.
The vertical axis is in years starting with 1990, ending with 1994.
The data points are:
1990 $379.6
1991 $425.9
1992 $521.5
1993 $577.6
1994 $620.0
___________________________________________________________________________
Page 3 of 3
APPENDIX TO EXHIBIT #13
___________________________________________________________________________
Title: Capital Expenditures
The horizontal axis is in millions of dollars starting at zero,
increasing in $100
million increments, ending at $500 million.
The vertical axis is in years starting with 1990, ending with 1994.
The data points are:
1990 $242.9
1991 $339.4
1992 $403.2
1993 $365.2
1994 $271.6
___________________________________________________________________________
Title: Dividends Per Common share
The horizontal axis is in dollars starting at $0.00,
increasing in $.50 increments,
ending at $2.00.
The vertical axis is in years starting with 1990, ending with 1994.
The data points are:
1990 $1.065
1991 $1.27
1992 $1.50
1993 $1.74
1994 $1.98
___________________________________________________________________________