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, 1995
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, 1995: 372,335,498
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
1995 1994 1995 1994
Sales . . . . . . . . . . . . . . $1,332.5 $1,149.0 $2,556.7 $2,281.9
Costs and expenses:
Cost of sales. . . . . . . . . . 272.5 227.4 508.3 460.6
Selling, general
and administrative. . . . . . . 511.9 447.1 967.7 873.2
Research and development . . . . 162.1 149.5 309.3 289.1
Other expense, net . . . . . . . 20.4 15.7 28.4 12.0
966.9 839.7 1,813.7 1,634.9
Income before income taxes. . . . 365.6 309.3 743.0 647.0
Income taxes . . . . . . . . . . 89.5 75.8 182.0 158.5
Income from continuing operations 276.1 233.5 561.0 488.5
Discontinued operations, net of
tax:
Income (loss) from operations . (3.9) 7.2 (10.2) 5.4
Loss on disposal. . . . . . . . (156.2) - (156.2) -
Net income. . . . . . . . . . . . $ 116.0 $ 240.7 $ 394.6 $ 493.9
Earnings per common share:
Continuing operations . . . . . $ .74 $ .61 $ 1.51 $ 1.27
Discontinued operations:
Income (loss) from operations. (.01) .02 (.03) .01
Loss on disposal . . . . . . . (.42) - (.42) -
Total . . . . . . . . . . . . . . $ .31 $ .63 $ 1.06 $ 1.28
Dividends per common share. . . . $ .29 $ .255 $ .545 $ .48
<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,
1995 1994
Assets
Cash and cash equivalents . . . . . . . . $ 226.8 $ 115.6
Accounts receivable, net. . . . . . . . . 814.2 627.9
Inventories . . . . . . . . . . . . . . . 474.4 466.3
Prepaid expenses, deferred income
taxes and other current assets . . . . . 536.6 529.3
Total current assets. . . . . . . . . 2,052.0 1,739.1
Property, plant and equipment . . . . . . 3,013.2 3,049.7
Less accumulated depreciation . . . . . . 1,005.4 967.4
Property, net . . . . . . . . . . . . 2,007.8 2,082.3
Intangible assets, net. . . . . . . . . . 171.3 168.3
Other assets. . . . . . . . . . . . . . . 375.7 336.0
$4,606.8 $4,325.7
Liabilities and Shareholders' Equity
Accounts payable. . . . . . . . . . . . . $ 274.5 $ 285.2
Short-term borrowings and current
portion of long-term debt. . . . . . . . 752.0 782.3
Other accrued liabilities . . . . . . . . 1,032.0 961.3
Total current liabilities . . . . . . 2,058.5 2,028.8
Long-term debt. . . . . . . . . . . . . . 186.3 185.8
Other long-term liabilities . . . . . . . 566.7 536.7
Shareholders' Equity:
Preferred shares - $1 par value
each; issued - none. . . . . . . . . . . - -
Common shares - $1 par value each; shares
issued: 1995 - 502,965,382;
1994 - 251,482,691 . . . . . . . . . . . 503.0 251.5
Paid-in capital . . . . . . . . . . . . . 4.7 133.3
Retained earnings . . . . . . . . . . . . 4,063.4 3,978.2
Foreign currency translation
adjustment and other . . . . . . . . . . (90.4) (117.0)
Total . . . . . . . . . . . . . . . . 4,480.7 4,246.0
Less treasury shares, at cost -
1995, 130,629,884 shares;
1994, 65,468,430 shares . . . . . . . . 2,685.4 2,671.6
Total shareholders' equity. . . . . . 1,795.3 1,574.4
$4,606.8 $4,325.7
<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)
1995 1994
Operating Activities:
Income from continuing operations . . . . $ 561.0 $ 488.5
Depreciation and amortization . . . . . . 78.8 71.2
Working capital changes - source (use):
Accounts receivable. . . . . . . . . . . (192.8) (98.3)
Inventories. . . . . . . . . . . . . . . (11.9) (39.4)
Other current assets . . . . . . . . . . (31.9) (32.2)
Accounts payable and other accrued
liabilities . . . . . . . . . . . . . . 41.3 23.0
Other, net. . . . . . . . . . . . . . . . (58.4) 3.4
Net cash provided by operating. . . . . .
activities . . . . . . . . . . . . . . . 386.1 416.2
Investing Activities:
Reduction of investments. . . . . . . . . 45.1 98.7
Purchases of investments. . . . . . . . . (49.3) (11.9)
Capital expenditures. . . . . . . . . . . (103.7) (132.6)
Other, net. . . . . . . . . . . . . . . . (1.6) -
Net cash used for investing . . . . . . .
activities . . . . . . . . . . . . . . . (109.5) (45.8)
Financing Activities:
Net change in short-term borrowings . . . (42.6) (211.3)
Common shares repurchased . . . . . . . . (13.8) (105.0)
Dividends paid to common shareholders . . (202.8) (185.4)
Proceeds from other equity. . . . . . . .
transactions . . . . . . . . . . . . . . 15.0 6.8
Other, net. . . . . . . . . . . . . . . . .5 .1
Net cash used for financing. . . . . . .
activities . . . . . . . . . . . . . . . (243.7) (494.8)
Effect of Exchange Rates on Cash and
Cash Equivalents. . . . . . . . . . . . . (1.4) .1
Net Cash Flow from Continuing Operations . 31.5 (124.3)
Net Cash Flow from Discontinued Operations 79.7 2.8
Net Increase (Decrease) in Cash and
Cash Equivalents. . . . . . . . . . . . . 111.2 (121.5)
Cash and Cash Equivalents, Beginning
of Period . . . . . . . . . . . . . . . . 115.6 222.2
Cash and Cash Equivalents, End of Period . $ 226.8 $ 100.7
<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 1994
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.
Discontinued Operations
On June 28, 1995, the Company completed the sale of its worldwide
contact lens business. In connection therewith, the Company
recorded a loss on disposal of $156.2, net of tax benefits of
$75.3, ($.42 per share). Proceeds from the sale were $47.5. The
contact lens business is reported as a discontinued operation for
all periods presented. The statements of consolidated income and
cash flows have been restated to conform to the discontinued
operation presentation.
Contact lens sales for the three and six months ended June 30,
1995 were $26.1 and $46.2, respectively; sales for the three and
six months ended June 30, 1994 were $41.0 and $69.8,
respectively.
Earnings Per Common Share
On April 4, 1995, the Board of Directors of the Company
authorized a 2-for-1 stock split, and voted to increase the
number of authorized common shares from 300 million to 600
million. Distribution of the split shares was made on June 9,
1995. The per share amounts included in these consolidated
financial statements reflect the stock split.
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, 1995 and 1994 were
372,105,000 and 385,936,000, respectively.
Inventories
Inventories consisted of:
June 30, December 31,
1995 1994
Finished products . . . . . . . $ 168.3 $ 180.1
Goods in process. . . . . . . . 196.5 193.8
Raw materials and supplies. . . 109.6 92.4
Total inventories . . . . . . $ 474.4 $ 466.3
Sales
Segment sales for the six months ended June 30, 1995 and 1994
were as follows:
1995 1994
Pharmaceutical products . . . . $2,186.4 $1,903.9
Health care products. . . . . . 370.3 378.0
Consolidated sales. . . . . . $2,556.7 $2,281.9
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, 1995 were not material.
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 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 $3.0, but the insurance carriers have reserved their rights
with respect to liability for punitive damages. The Company has
instituted a lawsuit against its insurance carriers seeking a
declaration from the state court in Oregon that the carriers are
obligated to indemnify the Company for any punitive damages it
may be required to pay in connection with the underlying product
liability action.
The Company, along with other prescription drug manufacturers, is
a defendant in more than 145 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. Another of these actions
has been certified as a class of all pharmaceutical consumers in
California seeking to recover treble damages for overcharges on
prescription drugs purchased at retail. Other cases alleging to
be class actions under various state laws have also been brought.
The Company believes that all these actions are without merit and
is defending itself vigorously against all such claims.
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations
Results of Operations - three and six months ended June 30, 1995
compared with the corresponding periods in 1994.
On June 28, 1995, the Company completed the sale of its worldwide
contact lens business. The following results exclude the
Company's contact lens business, which has been treated as a
discontinued operation for all periods presented.
Consolidated sales for the second quarter increased $183.5
million or 16 percent compared with the same period in 1994. For
the six months, sales rose $274.8 million or 12 percent over
1994. Excluding the effect of foreign currency exchange rate
changes, consolidated sales grew 12 percent in the quarter and 9
percent for the six-month period.
In the United States, many of the Company's pharmaceutical
products are subject to increasingly competitive pricing as
managed care groups, institutions and government agencies 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 of INTRON A, the Company's alpha-2 interferon anticancer
and antiviral agent, declined in Japan as a result of various
1994 cost-containment efforts by the Japanese health authorities
on the overall interferon market. In addition, several other
markets have been affected by the implementation of across-the-
board price cuts and government-imposed restrictions.
Since the Company is unable to predict the form and timing of
domestic and international governmental health care reform
actions, their effect on future operations and cash flows cannot
be reasonably estimated.
Sales
Domestic prescription pharmaceutical sales advanced 26 percent
for the 1995 second quarter and 21 percent for the six-month
period. Sales of respiratory products increased 30 percent in the
quarter and 32 percent for the first half, reflecting significant
market share growth for the CLARITIN brand of nonsedating
antihistamines. CLARITIN-D, which combines the decongestant
pseudoephedrine, was launched in the U.S. in November 1994.
Sales growth in both periods was also aided by increases for
VANCENASE allergy and VANCERIL asthma products. Despite generic
competition for the solution, tablet and syrup formulations,
sales for the PROVENTIL line of asthma products grew modestly in
both the quarter and six-month period, due to higher prescription
levels for the metered dose inhaler. These gains were tempered by
lower solution sales following the nonrecurrence of heavy 1994
purchases, which resulted from the recall of a competitor's
product. The Food and Drug Administration (FDA) has issued
bioequivalence standards for generic albuterol metered dose
inhalers. Generic entries are expected to enter the market in
the future. The introduction of a generic inhaler will
negatively affect sales and profitability of PROVENTIL.
U.S. sales of cardiovascular products rose 77 percent in the
quarter and 26 percent for the six months, reflecting
prescription growth for IMDUR, a once-daily oral nitrate, and K-
DUR potassium supplements. The quarter sales increase also was
due to promotional programs for NITRO-DUR transdermal
nitroglycerin patches. Sales of anti-infective and anticancer
products were essentially flat in the second quarter, but
advanced 15 percent for the six-month period. The quarter
performance reflects growth for EULEXIN, a prostate cancer
therapy, which was offset by lower INTRON A sales. For the first
half, prescription growth for EULEXIN and expanded indication
usage of INTRON A accounted for the sales increase.
International pharmaceutical sales increased 4 percent in the
second quarter and 3 percent for the six-month period after
excluding the impact of foreign currency exchange fluctuations.
Sales of respiratory products grew 13 percent in the quarter and
15 percent for the six months, due to higher sales of CLARITIN in
Europe and allergy products in Japan. Cardiovascular product
sales rose 10 percent in both the three- and six-month periods,
reflecting growth for NITRO-DUR in Europe and Latin America.
Sales of dermatological products increased 6 percent in the
quarter and 8 percent for the six months, reflecting advances for
topical steroids. Sales growth in both periods was also aided by
higher sales of LOSEC, an anti-ulcer treatment licensed from AB
Astra.
International sales of anti-infective and anticancer products
declined 1 percent in the second quarter and 6 percent in the
first half, due to continued shortfalls of INTRON A in Japan.
These declines were moderated by higher sales in several markets
of EULEXIN and CEDAX, a third-generation cephalosporin.
Health care product sales increased 5 percent in the 1995 second
quarter, but declined 2 percent for the six-month period. The
quarter sales advance reflects increased sales of allergy/cold
products as a result of an extended cold and flu season, and
higher foot care product sales due to growth in recently launched
products. The six-month decline in health care products sales
reflects lower sales of sun care products due to a highly
competitive marketplace.
Income before income taxes from continuing operations increased
18 percent for the quarter as compared with 1994, and represented
27.4 percent of sales versus 26.9 percent last year. For the
six months, income before income taxes grew 15 percent over 1994,
representing 29.1 percent of sales compared with 28.4 percent
last year.
Cost of sales as a percentage of sales increased to 20.4 percent
from 19.8 percent in the quarter, principally the result of an
unfavorable sales mix of lower margin pharmaceutical products in
international markets. For the first half, the cost of sales
ratio declined to 19.9 percent from 20.2 percent, as a favorable
sales mix of higher margin pharmaceutical products in the U.S.
mitigated the impact of the unfavorable sales mix in
international markets.
Selling, general and administrative expenses represented 38.4
percent of sales in the second quarter compared with 38.9 percent
last year. For the six-month period, the ratio was 37.9 percent
versus 38.3 percent in 1994. The improved ratios resulted from
controls on administrative costs. Marketing-related expenses as
a percentage of sales remained the same as last year.
Research and development spending rose 8 percent in the quarter,
representing 12.2 percent of sales compared with 13.0 percent a
year ago. For the first half, spending grew 7 percent and
represented 12.1 percent of sales versus 12.7 percent in 1994.
It is anticipated that total research and development expenses
will approximate $650 million in 1995.
The effective tax rate for continuing operations was 24.5 percent
in the three- and six-month periods of both 1995 and 1994.
Earnings per common share from continuing operations advanced 21
percent in the second quarter to $.74 from $.61 in 1994. For the
six-month period, earnings per common share from continuing
operations increased 19 percent to $1.51 from $1.27 last year.
Excluding the impact of changes in foreign currency exchange
rates, earnings per common share from continuing operations would
have risen approximately 18 percent in the quarter and 16 percent
for the six months.
Discontinued Operations
In connection with the sale of the worldwide contact lens
business, the Company recorded a loss on disposal of $156.2
million, net of tax benefits of $75.3 million, or $.42 per share
in the 1995 second quarter. Worldwide contact lens sales for the
three and six months ended June 30, 1995 were $26.1 million and
$46.2 million, respectively. For the corresponding periods of
1994 sales totaled $41.0 million and $69.8 million, respectively.
Liquidity and financial resources - six months ended June 30,
1995.
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 from operations totaled $386.1 million for the first six
months of 1995. This cash funded the spending of $202.8 million
for shareholder dividends, $103.7 million for capital
expenditures and $13.8 million for common share repurchases. Net
cash flow from discontinued operations totaled $79.7 million, and
includes the proceeds from the sale of the worldwide contact lens
business, related tax benefits and cash results of discontinued
operations for the first six months of 1995.
In February 1995, the Company completed a $500 million repurchase
program, which had begun in 1994. In June, the Board of
Directors authorized the purchase of an additional $500 million
of common shares.
The Company's liquidity and financial resources continue to be
sufficient to meet its operating needs.
PART II OTHER INFORMATION
Item 1. Legal Proceedings
The penultimate paragraph of Item 3, Legal Proceedings of
Part I of the Company's annual report on Form 10-K for the fiscal
year ended December 31, 1994, relating to a product liability
lawsuit involving THEO-DUR, is incorporated by reference. In
June 1995, the Company instituted a lawsuit against its insurance
carriers seeking a declaration from the state court in Oregon
that the carriers are obligated to indemnify the Company for any
punitive damages it may be required to pay in connection with the
underlying product liability action.
The final paragraph of Item 3, Legal Proceedings of Part I
of the Company's annual report on Form 10-K for the fiscal year
ended December 31, 1994, relating to certain antitrust actions
pending against the Company and other prescription drug
manufacturers, is incorporated by reference. More than 145 such
actions have been commenced. One such action has been certified
as a class of all pharmaceutical consumers in California seeking
to recover treble damages for overcharges on prescription drugs
purchased at retail. Other cases alleging to be class actions
under various state laws have also been brought.
Item 4. Submission of Matters to a Vote of Security Holders
(a) The Annual Meeting of Shareholders was held on April 25,
1995.
(b) Not applicable.
(c) The designation of Deloitte & Touche LLP to audit the books
and accounts of the Company for the year ending December 31,
1995 was ratified by a vote of shares, as follows:
FOR AGAINST ABSTAIN
166,029,179 347,381 423,155
All of the nominees for director were elected for a three year
term by a vote of shares, as follows:
FOR WITHHELD
Hugh A. D'Andrade 166,041,867 757,848
Richard J. Kogan 166,043,978 755,737
Richard de J. Osborne 166,039,695 760,020
William A. Schreyer 165,990,794 808,921
R.J. Ventres 165,903,630 896,085
(d) None
Item 6. Exhibits and Reports on Form 8-K
a) Exhibits - The following Exhibits are filed with this
document:
Exhibit 3(i) - Certificate of Incorporation of the Company,
as amended
Exhibit 11 - Computation of Earnings Per Common Share
Exhibit 27 - Financial Data Schedule
Exhibit 99 - Forward-looking statements by the Company.
b) Reports on Form 8-K:
A report on Form 8-K was filed on June 30, 1995. Item 5,
Other events, and Item 7, Financial Statements and Exhibits,
were reported on relating to the disposition of the Wesley-
Jessen vision care business.
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 August 11, 1995 /s/ Thomas H. Kelly
Thomas H. Kelly
Vice President and Controller