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 September 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 September 30, 1995: 367,568,011
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 Nine Months
Ended Ended
September 30 September 30
1995 1994 1995 1994
Sales . . . . . . . . . . . . . . $1,256.8 $1,095.2 $3,813.5 $3,377.1
Costs and expenses:
Cost of sales. . . . . . . . . . 237.8 206.3 746.1 666.9
Selling, general
and administrative. . . . . . . 509.7 429.0 1,477.4 1,302.2
Research and development . . . . 165.8 158.0 475.1 447.1
Other expense, net . . . . . . . 8.9 2.3 37.3 14.3
922.2 795.6 2,735.9 2,430.5
Income before income taxes. . . . 334.6 299.6 1,077.6 946.6
Income taxes. . . . . . . . . . . 82.0 73.4 264.0 231.9
Income from continuing operations 252.6 226.2 813.6 714.7
Discontinued operations, net of
tax:
Income (loss) from operations . - (1.9) (10.2) 3.5
Loss on disposal. . . . . . . . - - (156.2) -
Net income. . . . . . . . . . . . $ 252.6 $ 224.3 $ 647.2 $ 718.2
Earnings per common share:
Continuing operations . . . . . $ .68 $ .59 $ 2.19 $ 1.86
Discontinued operations:
Income (loss) from operations. - - (.03) .01
Loss on disposal . . . . . . . - - (.42) -
Total . . . . . . . . . . . . . . $ .68 $ .59 $ 1.74 $ 1.87
Dividends per common share. . . . $ .29 $ .255 $ .835 $ .735
<FN>
See notes to consolidated financial statements.
PAGE
SCHERING-PLOUGH CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
(Dollars in millions, except per share figures)
September 30, December 31,
1995 1994
Assets
Cash and cash equivalents . . . . . . . . $ 336.7 $ 115.6
Accounts receivable, net. . . . . . . . . 557.0 627.9
Inventories . . . . . . . . . . . . . . . 468.1 466.3
Prepaid expenses, deferred income
taxes and other current assets . . . . . 568.1 529.3
Total current assets. . . . . . . . . 1,929.9 1,739.1
Property, plant and equipment . . . . . . 3,050.1 3,049.7
Less accumulated depreciation . . . . . . 1,027.0 967.4
Property, net . . . . . . . . . . . . 2,023.1 2,082.3
Other assets. . . . . . . . . . . . . . . 601.2 504.3
$4,554.2 $4,325.7
Liabilities and Shareholders' Equity
Accounts payable. . . . . . . . . . . . . $ 282.2 $ 285.2
Short-term borrowings and current
portion of long-term debt. . . . . . . . 791.8 782.3
Other accrued liabilities . . . . . . . . 1,145.4 961.3
Total current liabilities . . . . . . 2,219.4 2,028.8
Long-term debt. . . . . . . . . . . . . . 86.3 185.8
Other long-term liabilities . . . . . . . 553.0 536.7
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 . . . . . . . . . . . . . 24.5 133.3
Retained earnings . . . . . . . . . . . . 4,208.6 3,978.2
Foreign currency translation
adjustment and other . . . . . . . . . . (100.9) (117.0)
Total . . . . . . . . . . . . . . . . 4,635.2 4,246.0
Less treasury shares, at cost -
1995, 135,397,371 shares;
1994, 65,468,430 shares . . . . . . . . 2,939.7 2,671.6
Total shareholders' equity. . . . . . 1,695.5 1,574.4
$4,554.2 $4,325.7
<FN>
See notes to consolidated financial statements.
PAGE
SCHERING-PLOUGH CORPORATION AND SUBSIDIARIES
STATEMENTS OF CONSOLIDATED CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30
(UNAUDITED)
(Dollars in millions)
1995 1994
Operating Activities:
Income from continuing operations . . . . $ 813.6 $ 714.7
Depreciation and amortization . . . . . . 120.1 107.2
Working capital changes - source (use):
Accounts receivable. . . . . . . . . . . 39.9 19.3
Inventories. . . . . . . . . . . . . . . (24.5) (23.6)
Other current assets . . . . . . . . . . (64.1) (60.6)
Accounts payable and other accrued
liabilities . . . . . . . . . . . . . . 173.1 79.5
Other, net. . . . . . . . . . . . . . . . (62.3) 1.4
Net cash provided by operating
activities . . . . . . . . . . . . . . . 995.8 837.9
Investing Activities:
Reduction of investments. . . . . . . . . 45.3 100.2
Purchases of investments. . . . . . . . . (80.4) (13.8)
Capital expenditures. . . . . . . . . . . (167.6) (198.0)
Other, net. . . . . . . . . . . . . . . . (1.5) 2.2
Net cash used for investing
activities . . . . . . . . . . . . . . . (204.2) (109.4)
Financing Activities:
Net repayments on short-term borrowings . (102.4) (303.6)
Common shares repurchased . . . . . . . . (268.0) (259.4)
Dividends paid to common shareholders . . (310.4) (283.4)
Proceeds from other equity
transactions . . . . . . . . . . . . . . 33.9 24.5
Other, net. . . . . . . . . . . . . . . . .6 2.8
Net cash used for financing
activities . . . . . . . . . . . . . . . (646.3) (819.1)
Effect of Exchange Rates on Cash and
Cash Equivalents. . . . . . . . . . . . . (3.9) .6
Net Cash Flow from Continuing Operations . 141.4 (90.0)
Net Cash Flow from Discontinued Operations 79.7 2.9
Net Increase (Decrease) in Cash and
Cash Equivalents. . . . . . . . . . . . . 221.1 (87.1)
Cash and Cash Equivalents, Beginning
of Period . . . . . . . . . . . . . . . . 115.6 222.2
Cash and Cash Equivalents, End of Period . $ 336.7 $ 135.1
<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 during 1995 through the date of disposition
were $46.2. Sales for the three and nine months ended September
30, 1994 were $30.5 and $100.3, 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 nine months ended September 30, 1995 and 1994 were
371,203,591 and 385,058,178, respectively.
Inventories
Inventories consisted of:
September 30, December 31,
1995 1994
Finished products . . . . . . . $ 202.9 $ 180.1
Goods in process. . . . . . . . 166.1 193.8
Raw materials and supplies. . . 99.1 92.4
Total inventories . . . . . . $ 468.1 $ 466.3
Sales
Segment sales for the nine months ended September 30, 1995 and
1994 were as follows:
1995 1994
Pharmaceutical products . . . . $3,290.4 $2,843.6
Health care products. . . . . . 523.1 533.5
Consolidated sales. . . . . . $3,813.5 $3,377.1
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 September 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 nine months ended September 30,
1995 compared with the corresponding periods in 1994.
In June 1995, the Company completed the sale of its worldwide
contact lens business. The following results exclude the contact
lens business, which has been treated as a discontinued operation
for all periods presented. For additional information, see
"Discontinued Operations" in the Notes to the Consolidated
Financial Statements on page 5.
Consolidated sales for the third quarter increased $161.6 million
or 15 percent compared with the same period in 1994. For the
nine months, sales rose $436.4 million or 13 percent over 1994.
Excluding the effect of foreign currency exchange rate changes,
consolidated sales grew 12 percent in the quarter and 10 percent
for the nine-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 27 percent
for the 1995 third quarter and 23 percent for the nine-month
period. Sales of respiratory products increased 35 percent in the
quarter and 33 percent for the nine months, 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
increased in both the quarter and nine-month periods, 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 36 percent in the
quarter and 29 percent for the nine months, reflecting
prescription growth for IMDUR, a once-daily oral nitrate, and K-
DUR potassium supplements. Sales of anti-infective and
anticancer products advanced 37 percent for the quarter and 22
percent for the nine months, due to prescription growth for
EULEXIN, a prostate cancer therapy, and expanded indication usage
of INTRON A.
International pharmaceutical sales increased 3 percent for both
the third quarter and nine-month period after excluding the
impact of foreign currency exchange fluctuations. Sales of
respiratory products grew 8 percent in the quarter and 13 percent
for the nine months, due to higher sales of CLARITIN in Europe
and Latin America, and VANCERIL in Japan. Cardiovascular product
sales rose 33 percent in the quarter and 18 percent for the nine
months, reflecting growth for NITRO-DUR transdermal nitroglycerin
patches in Europe and Canada. Sales of dermatological products
increased 8 percent in both the quarter and nine-month periods,
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
grew 6 percent in the quarter, but declined 2 percent in the nine
months. Continued shortfalls of INTRON A in Japan negatively
affected both the quarter and nine months. However, higher sales
of EULEXIN and CEDAX, a third-generation cephalosporin, in
several markets helped to moderate the impact of INTRON A in
Japan.
Health care product sales decreased 2 percent in both the third
quarter and nine-month periods. The quarter sales reflect lower
sales of allergy/cold and female health products. The nine-month
decline in health care product sales reflects continued declines
in female health products due to distribution losses and gains
made by private label brands, and lower sales of sun care
products reflecting a highly competitive market.
Income before income taxes from continuing operations increased
12 percent for the quarter as compared with 1994, and represented
26.6 percent of sales versus 27.4 percent last year. For the
nine months, income before income taxes from continuing
operations grew 14 percent over 1994, representing 28.3 percent
of sales compared with 28.0 percent last year.
Cost of sales as a percentage of sales increased slightly to 18.9
percent from 18.8 percent in the quarter, principally the result
of an unfavorable sales mix of lower margin pharmaceutical
products in international markets. For the nine-month period,
the cost of sales ratio declined slightly to 19.6 percent from
19.7 percent, as a favorable sales mix of higher margin
pharmaceutical products in the U.S. mitigated the impact of the
unfavorable international sales mix.
Selling, general and administrative expenses represented 40.5
percent of sales in the third quarter compared with 39.2 percent
last year. For the nine-month period, the ratio was 38.7 percent
versus 38.6 percent in 1994. The increase in the ratios resulted
from increased promotional spending in domestic and international
markets.
Research and development spending rose 5 percent in the quarter,
representing 13.2 percent of sales compared with 14.4 percent a
year ago. For the nine months, spending grew 6 percent and
represented 12.5 percent of sales versus 13.2 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 nine-month periods of both 1995 and 1994.
Earnings per common share from continuing operations advanced 15
percent in the third quarter to $.68 from $.59 in 1994. For the
nine-month period, earnings per common share from continuing
operations increased 18 percent to $2.19 from $1.86 last year.
Excluding the impact of changes in foreign currency exchange
rates, earnings per common share from continuing operations would
have risen approximately 14 percent in the quarter and 15 percent
for the nine months.
Liquidity and financial resources - nine months ended September
30, 1995.
Cash generated from operations continues to be the Company's
major source of funds to finance working capital, additions to
property, shareholder dividends and common share repurchases.
Cash provided from operations totaled $995.8 million for the
first nine months of 1995. This cash funded the spending of
$310.4 million for shareholder dividends, $268.0 million for
common share repurchases and $167.6 million for capital
expenditures. 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 1995, the Board of
Directors authorized the purchase of an additional $500 million
of common shares. As of September 30 this program was
approximately 50 percent complete.
The Company's liquidity and financial resources continue to be
sufficient to meet its operating needs.
PART II OTHER INFORMATION
Item 1. Legal Proceedings
The 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. In addition to the certified
federal class action, another 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 6. Exhibits and Reports on Form 8-K
a) Exhibits - The following Exhibits are filed with this
document:
Exhibit
Number Description
10(a) - Third Amendment to Employment Agreement
between the Company and Richard J. Kogan
10(b) - The Company's Deferred Compensation Plan
11 - Computation of Earnings Per Common Share
27 - Financial Data Schedule
99 - Forward-looking statements by the Company
b) Reports on Form 8-K:
No report has been filed during the three months ended
September 30, 1995.
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 November 9, 1995
Thomas H. Kelly
Vice President and Controller