Exhibit 13
Financial section of the Company's 1995 Annual Report to Shareholders.
Management's Discussion and Analysis of Operations and Financial
Condition
In June 1995, the Company completed the sale of its worldwide
contact lens business. The discussion of operations that follows
excludes the Company's 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 Consolidated Financial Statements on page 24.
Sales
Consolidated sales in 1995 totaled $5.10 billion, an increase of 13
percent over 1994, reflecting volume growth of 10 percent and
favorable foreign exchange rate fluctuations of 3 percent. This
performance was primarily due to significant sales gains for the
CLARITIN brand of nonsedating antihistamines that includes
CLARITIN-D, a combination product with a decongestant, launched
domestically in November 1994. Worldwide CLARITIN brand sales
totaled $789 million in 1995, compared with $505 million in 1994.
Consolidated 1994 sales of $4.54 billion advanced 7 percent over
1993, reflecting volume growth of 5 percent and price increases of
2 percent. The CLARITIN brand had dramatic sales growth, but sales
of INTRON A, the Company's alpha interferon anticancer and
antiviral agent, declined.
Worldwide 1995 pharmaceutical sales of $4.47 billion rose 15
percent over 1994, reflecting volume growth of 12 percent and
favorable foreign exchange rate fluctuations of 3 percent.
Worldwide sales of pharmaceutical products in 1994 increased 10
percent over 1993, due to volume growth of 7 percent, price
increases of 2 percent and favorable foreign exchange rate
fluctuations of 1 percent.
Domestic prescription pharmaceutical product sales grew 20 percent
in 1995. Sales of respiratory products increased 29 percent, due
to continued strong growth of the CLARITIN brand, the VANCENASE
line of allergy products and the VANCERIL line of asthma products.
The respiratory sales gain also reflected continued strong sales of
the PROVENTIL (albuterol) line of asthma products, due to an
increase in prescription levels for the metered-dose inhaler. Sales
of the PROVENTIL line totaled $422 million in 1995, and the
metered-dose inhaler contributed approximately 70 percent of this
amount. The PROVENTIL formulations of solution, syrup and tablets
have been subject to generic competition. In 1994, the Food and
Drug Administration (FDA) issued bioequivalence standards for
generic albuterol metered-dose inhalers, and subsequently in
December 1995 a generic inhaler was approved. In response, the
Company's generic pharmaceutical marketing subsidiary, Warrick
Pharmaceuticals, introduced a generic inhaler in December 1995.
Competition from generic metered-dose inhalers will negatively
affect future PROVENTIL sales and profitability. Respiratory sales
growth was moderated in 1995 by lower sales of THEO-DUR, a
sustained-action theophylline, due to increased generic
competition.
Domestic sales of anti-infective and anticancer products rose 18
percent compared with 1994, due to gains for EULEXIN, a therapy for
advanced prostate cancer, and INTRON A. In December 1995,
marketing approval was received from the FDA for CEDAX, a third-
generation cephalosporin antibiotic, which was launched in the
first quarter of 1996. Sales of cardiovascular products advanced
23 percent, reflecting significant market share increases for
IMDUR, an oral nitrate for angina, and K-DUR potassium supplement.
Dermatological product sales declined 3 percent, due to lower sales
of LOTRISONE, an antifungal/anti-inflammatory cream.
Domestic prescription pharmaceutical sales in 1994 advanced 20
percent over 1993, led by gains in respiratory products, reflecting
strong growth of the CLARITIN brand and advances for the VANCENASE
and VANCERIL product lines. Sales of anti-infective and
anticancer, dermatological and cardiovascular products also grew.
In 1995, sales of international ethical pharmaceutical products
increased 11 percent. Excluding the impact of foreign exchange
rate fluctuations, sales would have risen approximately 5 percent.
International sales of respiratory products advanced 11 percent
over 1994, led by growth for CLARITIN in Europe and higher allergy
product sales in Japan. Sales of cardiovascular products rose 17
percent, reflecting higher sales of NITRO-DUR transdermal
nitroglycerin patches. Dermatological product sales increased 7
percent, largely due to strong gains for topical steroids in
Europe.
International sales of anti-infective and anticancer products grew
2 percent in 1995, due to gains for EULEXIN and CEDAX. Countering
these gains were lower sales of INTRON A in Japan, as various
actions by the Japanese health authorities to control health care
costs resulted in a continued decline in the interferon market.
Sales of INTRON A in Japan decreased to $94 million in 1995 from
$141 million in 1994 and $307 million in 1993. INTRON A sales in
all other international markets, however, grew 13 percent to $235
million, with notable increases occurring in most major European
markets. Also contributing to the overall international sales
growth in 1995 were continued gains for LOSEC, an anti-ulcer
treatment licensed from AB Astra.
In 1994, international ethical pharmaceutical sales, excluding
foreign exchange, increased 1 percent over 1993, reflecting gains
for respiratory, dermatological and cardiovascular products. These
increases were offset by lower sales of anti-infective and
anticancer products, which were driven by a substantial decline in
INTRON A sales in Japan.
Worldwide sales of animal health products increased 11 percent in
1995, excluding favorable foreign exchange rate fluctuations of 3
percent. Contributing to the growth were the international launch
of NUFLOR, a broad-spectrum, multi-species antibiotic, and the U.
S. and international launches of OPTIMMUNE, an ophthalmic ointment.
Sales of animal health products in 1994 increased 8 percent over
1993. Changes in exchange rates did not affect the sales
comparison.
Sales of health care products in 1995 decreased 4 percent compared
with 1994, as price increases of 2 percent were more than offset by
volume declines of 6 percent. Over-the-counter (OTC) product sales
declined 5 percent, largely due to increasingly competitive markets
for vaginal antifungal products. Foot care and sun care sales
declined moderately from 1994 levels.
In 1994, health care product sales decreased 6 percent as volume
declines of 9 percent were partially offset by price increases of
3 percent. The sales decline largely reflected lower sales of OTC
products, primarily female health and allergy/cold products,
moderated by higher foot care product sales.
Income Before Income Taxes
Income before income taxes totaled $1.39 billion in 1995, an
increase of 14 percent over 1994. In 1994, income before income
taxes of $1.23 billion grew 14 percent over the $1.07 billion in
1993.
Summary of Costs and Expenses:
(Dollars in millions)
% Increase
1995 1994 1993 1995/94 1994/93
Cost of sales . . . . . . $1,004.8 $ 906.8 $ 862.4 11 % 5 %
% of sales . . . . . . . 19.7 % 20.0 % 20.4 %
Selling, general and
administrative . . . . . $1,990.4 $1,755.5 $1,698.5 13 % 3 %
% of sales . . . . . . . 39.0 % 38.7 % 40.2 %
Research and development. $ 656.9 $ 610.1 $ 567.3 8 % 8 %
% of sales . . . . . . . 12.9 % 13.4 % 13.4 %
________________________________________________________________________________________
Cost of sales as a percentage of sales has followed a downward
trend over the past three years. The improvement reflects a
favorable sales mix of higher margin pharmaceutical products and
continuing cost containment efforts throughout the world.
Selling, general and administrative expenses in 1995 increased as
a percentage of sales compared with 1994, resulting from increased
promotional and selling-related spending for the CLARITIN brand and
INTRON A in domestic and international markets. The 1994 decline
as a percent of sales from 1993 reflects lower promotional spending
for CLARITIN following the 1993 domestic launch, and reduced
spending for female health products.
Research and development expenses increased $46.8 million, or 8
percent, representing 12.9 percent of sales in 1995 and 13.4
percent of sales in 1994 and 1993. The higher spending reflects
the Company's funding of both internal research efforts and
research collaborations with various partners to develop a steady
flow of innovative products and line extensions.
Income Taxes
The Company's effective tax rate was 24.5 percent in 1995 and 1994,
and 24.0 percent in 1993. The effective tax rate for each period
was lower than the U.S. statutory income tax rate, principally due
to tax incentives in jurisdictions where the Company's primary
manufacturing facilities are located. For additional information,
see "Income Taxes" in the Notes to Consolidated Financial
Statements on page 31.
Income From Continuing Operations
Income in 1995 increased 14 percent to $1.05 billion. Income in
1994 increased 14 percent over 1993. Differences in year-to-year
exchange rates increased comparative income growth in 1995, but
reduced it in 1994. After eliminating these exchange differences,
income would have risen approximately 12 percent in 1995 and 15
percent in 1994.
Accounting Change
In 1993, the Company adopted Statement of Financial Accounting
Standards (SFAS) No. 106, "Employers' Accounting for Postretirement
Benefits Other Than Pensions." For additional information, see
"Other Post-retirement Benefits" in the Notes to Consolidated
Financial Statements on page 29.
Earnings Per Common Share
During the second quarter of 1995, the Board of Directors approved
a 2-for-1 stock split. All per share amounts, shares outstanding
and shares repurchased have been adjusted for the stock split.
1995 1994 1993
Earnings per common share from
continuing operations $ 2.85 $ 2.42 $ 2.09
Discontinued operations - income
(loss) from operations (.03) (.01) .02
Discontinued operations - loss on
disposal (.42) - -
Accounting change - - (.24)
Earnings per common share $ 2.40 $ 2.41 $ 1.87
Average shares outstanding
(in millions) 369.7 382.5 390.2
Earnings per common share from continuing operations rose 18
percent in 1995 and 16 percent in 1994. 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
increased comparative growth in earnings per common share in 1995,
but reduced it in 1994. Excluding the impact of these exchange
rate differences, earnings per common share from continuing
operations would have increased approximately 16 percent in 1995
and 17 percent in 1994.
Over the past three years, the Board of Directors has authorized
several share repurchase programs. Under these programs,
approximately 9.9 million common shares were purchased in 1995,
17.2 million common shares in 1994 and 14.0 million common shares
in 1993. At year end, the most recent $500 million program was 96
percent complete.
Environmental Matters
The Company has obligations for environmental 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.
Foreign Exchange and Inflation
Sales outside of the United States represented 45 percent of
worldwide sales in 1995 and 46 percent in 1994. Fluctuating
foreign exchange rates have affected sales and earnings, as
previously discussed. Sales and earnings growth in 1996 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 future exchange rate changes. For
additional information on these strategies, see "Financial
Instruments" in the Notes to Consolidated Financial Statements on
page 24. Inflation has had a minimal impact on operations in recent
years.
Additional Factors Influencing Operations
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. In most
international markets, the Company operates in an environment of
government-mandated cost containment programs. Several governments
have placed restrictions on physician prescription levels and
patient reimbursements, emphasized greater use of generic drugs and
enacted across-the-board price cuts as methods of cost control.
Since the Company is unable to predict the final form and timing of
any future domestic and international governmental or other health
care initiatives, their effect on operations and cash flows cannot
be reasonably estimated.
Liquidity and Financial Resources
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 by operating activities totaled $1,383.3 million in
1995, $1,270.1 million in 1994 and $923.6 million in 1993. The
1993 amount was reduced by $147.0 million for the funding of the
Company's accumulated post-retirement benefit obligation.
Capital expenditures amounted to $293.8 million in 1995, $268.2
million in 1994 and $339.9 million in 1993. It is anticipated that
expenditures will approximate $340 million in 1996 and include the
construction of a bulk chemical plant in Singapore, and a
manufacturing facility in Mexico. Commitments for 1996 capital
expenditures totaled $129.8 million at December 31, 1995.
Common shares repurchased in 1995 totaled 9.9 million shares at a
cost of $493.8 million. In 1994, 17.2 million shares were
repurchased for $599.4 million, and 14.0 million shares were
repurchased in 1993 at a cost of $418.3 million.
Dividend payments of $416.4 million were made in 1995, compared
with $379.4 million in 1994 and $339.6 million in 1993.
Dividends per common share were $1.125 in 1995, up from $.99 in
1994 and $.87 in 1993.
Short-term borrowings totaled $841.3 million at year-end 1995,
$782.3 million in 1994 and $1,076.0 million in 1993. A
reclassification of $100 million for current maturities of long-
term debt increased short-term borrowings in 1995. 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 36
percent in 1995 from 38 percent in 1994, resulting from a decrease
in total debt and an increase in shareholders' equity. The
Company's liquidity and financial resources continue to be
sufficient to meet its operating needs. As of December 31, 1995,
the Company had $822.6 million in unused lines of credit, of which
$510.0 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 & Poor's and Moody's,
respectively, as of December 31, 1995.
Securities Litigation Reform Act
Safe Harbor Statement under the Private Securities Litigation
Reform Act of 1995: Except for the historical information contained
herein, the matters discussed in this Annual Report are forward-
looking statements that involve risk and uncertainties, including
but not limited to economic, competitive, governmental and
technological factors affecting the Company's operations, markets,
products, services and prices, and other factors discussed in the
Company's filings with the Securities and Exchange Commission.
Schering-Plough Corporation and Subsidiaries
Statements of Consolidated Income
(Dollars in millions, except per share figures)
For The Years Ended December 31, 1995 1994 1993
Sales . . . . . . . . . . . . . . . . . . . . . $5,104.4 $4,536.6 $4,229.1
Costs and Expenses:
Cost of sales . . . . . . . . . . . . . . . . 1,004.8 906.8 862.4
Selling, general and administrative . . . . . 1,990.4 1,755.5 1,698.5
Research and development. . . . . . . . . . . 656.9 610.1 567.3
Other expense, net. . . . . . . . . . . . . . 57.6 37.5 27.8
Total costs and expenses . . . . . . . . . . 3,709.7 3,309.9 3,156.0
Income before Income Taxes. . . . . . . . . . . 1,394.7 1,226.7 1,073.1
Income taxes. . . . . . . . . . . . . . . . . 341.7 300.5 257.5
Income from continuing operations before
cumulative effect of accounting change . . . . 1,053.0 926.2 815.6
Discontinued operations:
Income (loss) from operations . . . . . . . . (10.2) (4.2) 9.4
Loss on disposal . . . . . . . . . . . . . . . (156.2) - -
___________________________________________________________________________________
Income before cumulative effect of
accounting change . . . . . . . . . . . . . . 886.6 922.0 825.0
Cumulative effect of accounting change . . . . - - (94.2)
___________________________________________________________________________________
Net Income. . . . . . . . . . . . . . . . . . . $ 886.6 $ 922.0 $ 730.8
Earnings per common share:
Continuing operations. . . . . . . . . . . . . $ 2.85 $ 2.42 $ 2.09
Discontinued operations:
Income (loss) from operations . . . . . . . . (.03) (.01) .02
Loss on disposal. . . . . . . . . . . . . . . (.42) - -
Cumulative effect of accounting change . . . . - - (.24)
___________________________________________________________________________________
Earnings Per Common Share . . . . . . . . . . . $ 2.40 $ 2.41 $ 1.87
Statements of Consolidated Retained Earnings
(Dollars in millions, except per share figures)
For The Years Ended December 31, 1995 1994 1993
Retained Earnings, Beginning of Year. . . . . . $3,978.2 $3,435.6 $3,044.4
Net income. . . . . . . . . . . . . . . . . . 886.6 922.0 730.8
Cash dividends on common shares (per share:
1995, $1.125; 1994, $.99; and 1993, $.87). . (416.4) (379.4) (339.6)
Effect of 2-for-1 stock split . . . . . . . . (106.6) - -
___________________________________________________________________________________
Retained Earnings, End of Year. . . . . . . . . $4,341.8 $3,978.2 $3,435.6
See Notes to Consolidated Financial Statements.
/TABLE
Schering-Plough Corporation and Subsidiaries
Statements of Consolidated Cash Flows
(Dollars in millions)
For The Years Ended December 31, 1995 1994 1993
Operating Activities:
Income from continuing operations after the
cumulative effect of accounting change. . . . . . . $1,053.0 $ 926.2 $ 721.4
Depreciation and amortization. . . . . . . . . . . . 157.1 144.6 130.9
Working capital changes - source (use):
Accounts receivable . . . . . . . . . . . . . . . 11.3 75.2 47.8
Inventories . . . . . . . . . . . . . . . . . . . (63.7) (34.1) (22.3)
Other current assets. . . . . . . . . . . . . . . (64.1) (109.9) (45.1)
Accounts payable, income taxes and accrued
liabilities. . . . . . . . . . . . . . . . . . . 283.3 161.6 100.4
Other, net . . . . . . . . . . . . . . . . . . . . . 6.4 106.5 (9.5)
Net cash provided by operating activities. . . . . . 1,383.3 1,270.1 923.6
Investing Activities:
Capital expenditures . . . . . . . . . . . . . . . . (293.8) (268.2) (339.9)
Reduction of investments . . . . . . . . . . . . . . 45.3 181.0 192.7
Purchases of investments . . . . . . . . . . . . . . (93.2) (37.1) (287.1)
Other, net . . . . . . . . . . . . . . . . . . . . . (1.8) (8.3) -
Net cash used for investing activities (343.5) (132.6) (434.3)
Financing Activities:
Common shares repurchased. . . . . . . . . . . . . . (493.8) (599.4) (418.3)
Cash dividends paid to common shareholders . . . . . (416.4) (379.4) (339.6)
Net change in short-term borrowings. . . . . . . . . (46.0) (292.1) 120.9
Net change in long-term debt . . . . . . . . . . . . 1.3 3.7 (.6)
Proceeds from other equity transactions. . . . . . . 44.4 33.1 33.7
Other, net . . . . . . . . . . . . . . . . . . . . . - - (62.4)
Net cash used for financing activities . . . . . . . (910.5) (1,234.1) (666.3)
Effect of Exchange Rates on Cash and Cash Equivalents. (3.2) (4.2) (1.4)
Net Cash Flow from Continuing Operations . . . . . . . 126.1 (100.8) (178.4)
Discontinued operations. . . . . . . . . . . . . . . . 79.7 (5.8) (5.7)
Net Increase (Decrease) in Cash and Cash Equivalents . 205.8 (106.6) (184.1)
Cash and Cash Equivalents, Beginning of Year . . . . . 115.6 222.2 406.3
Cash and Cash Equivalents, End of Year . . . . . . . . $ 321.4 $ 115.6 $ 222.2
See Notes to Consolidated Financial Statements.
/TABLE
Schering-Plough Corporation and Subsidiaries
Consolidated Balance Sheets
(Dollars in millions, except per share figures)
At December 31, 1995 1994
ASSETS
__________________________________________________________________________
Current Assets:
Cash and cash equivalents. . . . . . . . . . . $ 321.4 $ 115.6
Short-term investments . . . . . . . . . . . . .4 45.0
Accounts receivable, less allowances:
1995, $69.1; 1994, $57.5 . . . . . . . . . . 569.3 627.9
Inventories. . . . . . . . . . . . . . . . . . 502.0 466.3
Prepaid expenses, deferred income taxes
and other current assets. . . . . . . . . . . 563.2 484.3
Total current assets . . . . . . . . . . . . . 1,956.3 1,739.1
Property, at cost:
Land . . . . . . . . . . . . . . . . . . . . . 41.4 46.1
Buildings and improvements . . . . . . . . . . 1,528.2 1,450.4
Equipment. . . . . . . . . . . . . . . . . . . 1,250.8 1,283.7
Construction in progress . . . . . . . . . . . 315.6 269.5
Total. . . . . . . . . . . . . . . . . . . . . 3,136.0 3,049.7
Less accumulated depreciation. . . . . . . . . 1,037.1 967.4
Property, net. . . . . . . . . . . . . . . . . 2,098.9 2,082.3
Other Assets. . . . . . . . . . . . . . . . . . . . 609.4 504.3
$4,664.6 $4,325.7
1995 1994
LIABILITIES AND SHAREHOLDERS' EQUITY
___________________________________________________________________________
Current Liabilities:
Accounts payable . . . . . . . . . . . . . . . $ 374.2 $ 285.2
Short-term borrowings and current portion of
long-term debt . . . . . . . . . . . . . . . 841.3 782.3
U.S., foreign and state income taxes . . . . . 384.2 397.7
Accrued compensation . . . . . . . . . . . . . 205.1 170.5
Other accrued liabilities. . . . . . . . . . . 557.3 393.1
Total current liabilities. . . . . . . . . . . 2,362.1 2,028.8
Long-Term Liabilities:
Long-term debt . . . . . . . . . . . . . . . . 87.1 185.8
Deferred income taxes. . . . . . . . . . . . . 255.1 246.1
Other long-term liabilities. . . . . . . . . . 337.4 290.6
Total long-term liabilities. . . . . . . . . . 679.6 722.5
Shareholders' Equity:
Preferred shares - authorized 50,000,000,
$1 par value; issued-none . . . . . . - -
Common shares - authorized shares - 1995,
600,000,000; 1994, 300,000,000, $1
par value; shares issued - 1995,
502,965,382; 1994, 251,482,691. . . . . . . . 503.0 251.5
Paid-in capital. . . . . . . . . . . . . . . . 49.5 133.3
Retained earnings. . . . . . . . . . . . . . . 4,341.8 3,978.2
Foreign currency translation adjustment and
other . . . . . . . . . . . . . . . . . . . . (103.9) (117.0)
Total. . . . . . . . . . . . . . . . . . . . . 4,790.4 4,246.0
Less treasury shares, at cost - 1995,
138,796,653 shares; 1994, 65,468,430 shares . 3,167.5 2,671.6
Total shareholders' equity . . . . . . . . . . 1,622.9 1,574.4
$4,664.6 $4,325.7
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.
Use of Estimates
The preparation of financial statements in conformity with
generally accepted accounting principles requires management to
make estimates and use assumptions that affect certain reported
amounts and disclosures; actual amounts may differ.
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." Short-term
investments are generally held to maturity. Other investments,
included in other non-current assets, consist primarily of debt
and equity securities held in non-qualified trusts to fund
benefit obligations. 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 upon adoption of 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. Depreciation
expense was $142.7, $134.3 and $120.9 in 1995, 1994 and 1993,
respectively.
Intangible Assets
Intangible assets, included in other non-current assets,
principally include goodwill, patents, trademarks, licenses and
product rights. Intangible assets are recorded at cost and
amortized over their expected useful lives on the straight-line
method. 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 account in shareholders' equity.
For the remaining foreign subsidiaries, non-monetary assets and
liabilities are translated using historical rates, while monetary
assets and liabilities 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 foreign currency
translation adjustment account. Other exchange gains and losses
are included in income.
Net foreign exchange losses included in income were $4.0, $6.0
and $12.8 in 1995, 1994 and 1993, 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.
On April 4, 1995, the Board of Directors of the Company
authorized a 2-for-1 stock split. The number of shares and the
per share amounts included in these consolidated financial
statements reflect the stock split.
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 a tax benefit 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,
cash flows and related notes to consolidated financial statements
have been restated to conform to the discontinued operations
presentation.
Contact lens sales during 1995 through the date of disposition
were $46.2. Sales for the years ended December 31, 1994 and 1993
were $120.5 and $112.2, respectively. Income (loss) from
discontinued operations for the years ended December 31, 1995,
1994 and 1993 is net of tax benefits of $7.0, $9.3 and $4.1,
respectively.
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, 1995 December 31, 1994
Carrying Estimated Carrying Estimated
Value Fair Value Value Fair Value
Assets:
Cash and cash equivalents $321.4 $321.4 $115.6 $115.6
Short-term investments .4 .4 45.0 45.0
Other investments 142.2 142.2 83.0 83.0
Derivative Financial Instruments:
Foreign currency put options .2 - .7 .4
Forward exchange contracts - - 2.4 2.4
Liabilities:
Short-term borrowings 841.3 842.0 782.3 782.3
Long-term debt 87.1 88.9 185.8 189.2
Derivative Financial Instruments:
Interest rate swap contracts 1.5 1.5 19.4 19.4
Foreign currency swap contracts 64.5 81.3 68.8 100.8
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.
Investments
Short-term investments at December 31, 1994 consisted of
certificates of deposit and municipal obligations. Other
investments primarily consist of debt and equity securities held
in non-qualified trusts to fund benefit obligations. Gains and
losses during 1995 and 1994, 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:
- Hedging selective foreign exchange exposures that arise
from international operations, and
- 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:
1995 1994 1993
Europe, Middle East and Africa $264.1 $235.5 $218.4
Latin America 104.5 101.8 77.2
Canada, Pacific Area and Asia 128.5 138.8 205.7
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:
- 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.
- Historically, the major groups of currencies in which the
Company operates generally have not experienced dramatic
changes on a year-to-year basis.
- 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, put option contracts 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
or on a specified date. 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. Contracts outstanding at December 31,
1995, were not material. At December 31, 1994, yen option
contracts were outstanding, which provided the Company the right
to deliver 6.2 billion yen in exchange for $60.0 in 1995. Gains
and costs in both 1995 and 1994 were not material.
Financial Obligations
On a selective basis, the Company will enter into forward
exchange contracts to hedge near-term financial obligations
denominated in a foreign currency. At December 31, 1995, there
were no forward exchange contracts outstanding. At December 31,
1994, the Company's Mexican subsidiary held a forward contract
with a notional principal of $7.0 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 $2.4. Realized and unrealized gains and
losses are recorded as foreign exchange gains and losses and
offset the equivalent recorded loss or gain on the related
financial obligations.
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, 1995, the net investment in the subsidiary was
approximately 20.1 billion yen.
Long-term foreign currency interest rate swap contracts have been
used to hedge this net investment. Under contracts outstanding
at December 31, 1995 and 1994, 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 1995 and 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. The Company estimates that a 50 basis point
reduction in interest rates would favorably affect the fair value
of these contracts by approximately $2.7 and a 1 percent stronger
dollar-to-yen exchange rate would favorably affect the estimated
fair value by approximately $1.4.
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.
From 1993 to 1995, the Company changed the original market risk
of these arrangements by entering into partially offsetting
contracts. At December 31, 1995, the $650 and $950 arrangements
provide for the payment of interest based upon LIBOR and the
receipt of interest based upon an annual election of various
floating rates. As a result, the Company remains subject to a
moderate degree of market risk through maturity of the swaps. At
December 31, 1995 and 1994, the market value of these
arrangements was a liability of $1.5 and $19.4, respectively. It
is estimated that a 50 basis point change in interest rate
structure could change the market value of these arrangements by
approximately $2.7.
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, 1995 and 1994 was $689.0 and $601.7,
respectively. Bank loans and notes payable at December 31, 1995
and 1994 totaled $52.1 and $178.2, respectively. The weighted-
average interest rate for short-term borrowings at
December 31, 1995 and 1994 was 6.1 percent and 6.4 percent,
respectively.
At December 31, 1995, unused domestic bank lines of credit, which
were considered as support for commercial paper borrowings, were
$510.0. 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 $312.6 in unused
lines of credit from various financial institutions at December
31, 1995. 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:
1995 1994
Notes, 7.8%, due 1996 . . . . . . . . . . . . $100.0 $100.0
Industrial revenue bonds, 3.8%-12.0%,
due 2001-2013 . . . . . . . . . . . . . . . 80.0 80.0
Other . . . . . . . . . . . . . . . . . . . . 7.3 8.2
187.3 188.2
Current maturities. . . . . . . . . . . . . . (100.2) (2.4)
Total long-term debt. . . . . . . . . . . . . $ 87.1 $185.8
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 accumulated 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
1995 and 1994 balance sheets.
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, 1995, no debt securities have been issued
pursuant to this registration.
Interest Income and Interest Expense
Interest income for 1995, 1994 and 1993 was $22.6, $17.2 and
$23.8, respectively.
Interest expense, net of amounts capitalized as part of the
construction cost of property, plant and equipment, for 1995,
1994 and 1993 was $57.6, $56.2 and $48.2, respectively.
Interest costs of $11.4, $11.4 and $12.7 in 1995, 1994 and 1993,
respectively, have been capitalized and included in the cost of
property, plant and equipment. Total cash payments for interest,
net of amounts capitalized, were $56.3, $54.9 and $49.4 in 1995,
1994 and 1993, respectively.
Interest income and interest expense are included in other
expense, net.
Stock Incentive Plans
Under the terms of the Company's 1992 Stock Incentive Plan, 18
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, 1994. . . . . 8,760,812 $ 4.40-$33.19
Granted . . . . . . . . . . . . . . 2,607,166 $29.82-$37.06
Exercised . . . . . . . . . . . . . (1,511,374) $ 4.40-$29.44
Canceled or expired . . . . . . . . (202,670)
Outstanding at December 31,1994 . . . . 9,653,934 $ 4.94-$37.06
Granted . . . . . . . . . . . . . . 1,911,920 $39.06-$59.25
Exercised . . . . . . . . . . . . . (1,743,223) $ 4.94-$34.13
Canceled or expired . . . . . . . . (99,854)
Outstanding at December 31, 1995. . . . 9,722,777 $ 8.00-$59.25
Exercisable at December 31, 1995. . . . 6,346,127
As of December 31, 1995 and 1994, there were 1,576,032 and
1,542,920 deferred stock units outstanding, respectively, under
current and prior plans. There were 714,208 shares issued in
1995 and 1,014,772 shares issued in 1994. At December 31, 1995,
there were 10,248,918 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:
1995 1994 1993
Service cost - benefits earned during
the year. . . . . . . . . . . . . . . $ 29.1 $ 32.2 $ 25.9
Interest cost on projected benefit
obligations . . . . . . . . . . . . . 47.0 42.0 40.3
Actual return on plan assets . . . . . (152.8) .5 (101.2)
Net amortization and deferral . . . . . 78.8 (68.4) 38.1
Net pension expense . . . . . . . . . . $ 2.1 $ 6.3 $ 3.1
The year-to-year changes in the net amortization and deferral
component of pension expense 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
1995 1994 1995 1994
Projected benefit obligations:
Accumulated benefit obligations,
including vested benefits of
$571.4 in 1995 and $449.2 in 1994. . . $532.4 $426.4 $83.9 $ 73.0
Effect of future salary increases . . . 85.6 70.2 25.8 20.5
Total projected benefit obligations . . . 618.0 496.6 109.7 93.5
Plan assets at fair value,
primarily stocks and bonds. . . . . . . 822.4 688.7 17.3 13.7
Plan assets over (under) projected
benefit obligations . . . . . . . . . . 204.4 192.1 (92.4) (79.8)
Unrecognized net transition (asset)
liability . . . . . . . . . . . . . . . (77.4) (86.6) 6.1 6.6
Unrecognized prior service cost . . . . . 5.6 6.0 7.6 8.7
Unrecognized net (gain) loss. . . . . . . (9.8) (10.3) 20.9 15.3
Net pension asset (liability) . . . . . . $122.8 $101.2 $(57.8) $(49.2)
In addition to the plan assets indicated above, at December 31,
1995 and 1994, securities of $64.5 and $45.7, respectively, were
held in non-qualified trusts designated to provide pension
benefits for certain plans presented as under-funded.
The discount rate used in determining the projected benefit
obligation for the Company's U.S. plans was 7.0 percent at
December 31, 1995, and 8.25 percent at December 31, 1994. The
weighted-average discount rate for the Company's non-U.S. plans
was 7.1 percent at December 31, 1995, and 7.4 percent at December
31, 1994. The weighted-average rate of increase in future
compensation levels for all plans was 4.2 percent at December 31,
1995 and 1994. The weighted-average expected long-term rate of
return on plan assets was approximately 10 percent for both
years.
The 1995 discount rate change increased the total projected
benefit obligation by approximately $80.0. The remaining
increase reflects 1995 service and interest costs.
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 $57.8, $56.4 and $54.8 in 1995, 1994 and
1993, 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 $.24 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 expense (income)
were as follows:
1995 1994 1993
Service cost - benefits earned during the year. . . $ 3.9 $ 5.7 $ 4.7
Interest cost on accumulated post-retirement
benefit obligation . . . . . . . . . . . . . . . . 10.7 10.3 12.1
Actual return on plan assets. . . . . . . . . . . . (35.4) 2.0 (15.9)
Net deferral. . . . . . . . . . . . . . . . . . . . 20.3 (15.5) 4.2
Post-retirement benefit expense (income). . . . . . $ (.5) $ 2.5 $ 5.1
The year-to-year changes in the net deferral component of post-
retirement benefit expense (income) are principally attributable
to differences between actual and expected returns on plan assets.
The accumulated post-retirement benefit obligation and funded
status at December 31, were as follows:
1995 1994
Accumulated post-retirement benefit
obligation attributable to:
Retirees. . . . . . . . . . . . . . . . . . . . . $83.4 $ 67.6
Fully eligible active plan participants . . . . . 30.1 24.6
Other active plan participants. . . . . . . . . . 50.4 38.2
Accumulated post-retirement benefit obligation. . . . 163.9 130.4
Plan assets at fair value,
primarily stocks and bonds. . . . . . . . . . . . . 179.4 150.2
Plan assets in excess of accumulated post-retirement
benefit obligation. . . . . . . . . . . . . . . . . 15.5 19.8
Unrecognized net gain . . . . . . . . . . . . . . . . (23.1) (27.6)
Accrued post-retirement benefit liability . . . . . . $(7.6) $ (7.8)
The assumed health care cost trend rates used for measurement
purposes were 9.8 percent for 1996, trending down to 5.0 percent
by 2003. The weighted-average discount rate used was 7.0 percent
at December 31, 1995, and 8.25 percent at December 31, 1994. The
weighted-average expected long-term rate of return on plan assets
was 9 percent at December 31, 1995 and 1994.
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. In January
1993, the Company fully funded its initial accumulated benefit
obligation. Future funding is at the discretion of the Company.
The 1995 discount rate change increased the accumulated benefit
obligation by approximately $20.0. The remaining increase
reflects 1995 service and interest costs.
At December 31, 1995, a 1 percent increase in the assumed health
care cost trend rate would increase the combined service and
interest cost by approximately 14 percent and the accumulated
post-retirement benefit obligation by approximately 13 percent.
Shareholders' Equity
On April 4, 1995, the Board of Directors voted to increase the
number of authorized shares from 300 million to 600 million and
approved a 2-for-1 stock split. Distribution of the split shares
was made on June 9, 1995.
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's 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 four-hundredth of a share of Series A Junior
Participating Preferred Stock, par value $1 per share, of the
Company at an exercise price of $62.50. 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 $.0025 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 millions):
Common Paid-in Treasury Shares
Shares Capital Number Amount
Balance at January 1, 1993. . . $251.5 $47.5 52.0 $1,655.6
Shares issued under stock
incentive plans . . . . . . . - 41.8 (1.0) (4.0)
Warrant transactions . . . . . - (8.4) - -
Purchase of treasury shares. . - - 7.0 418.3
____________________________________________________________________
Balance at December 31, 1993. . 251.5 80.9 58.0 2,069.9
Shares issued under stock
incentive plans . . . . . . . - 52.4 (1.1) 2.3
Purchase of treasury shares. . - - 8.6 599.4
____________________________________________________________________
Balance at December 31, 1994. . 251.5 133.3 65.5 2,671.6
Effect of 2-for-1 stock split. 251.5 (145.0) 65.4 -
Shares issued under stock
incentive plans . . . . . . . - 61.2 (2.0) 2.1
Purchase of treasury shares. . - - 9.9 493.8
____________________________________________________________________
Balance at December 31, 1995. . $503.0 $ 49.5 138.8 $3,167.5
At December 31, 1995, warrants to purchase 15.3 million common
shares are outstanding; 10.2 million warrants, exercisable
during November 1996, have a strike price of $45 per share and 5.1
million warrants, exercisable during the 90-day period ended
November 22, 1996, have a strike price of $48.67 per share.
Inventories
Year-end inventories consisted of the following:
1995 1994
Finished products . . . . . . . . . . . . . . $213.2 $180.1
Goods in process. . . . . . . . . . . . . . . 179.4 193.8
Raw materials and supplies. . . . . . . . . . 109.4 92.4
Total inventories . . . . . . . . . . . . . . $502.0 $466.3
Inventories valued on a last-in, first-out basis comprised
approximately 39 percent and 36 percent of total inventories at
December 31, 1995 and 1994, respectively. The estimated
replacement cost of total inventories at December 31, 1995 and
1994 was $549.7 and $520.1, respectively.
Income Taxes
U.S. and foreign operations contributed to income before income
taxes as follows:
1995 1994 1993
United States. . . . . . . . . . . . . $ 916.7 $ 765.6 $ 587.8
Foreign. . . . . . . . . . . . . . . . 478.0 461.1 485.3
Total income before income taxes . . . $1,394.7 $1,226.7 $1,073.1
The components of income tax expense were as follows:
1995 1994 1993
Current:
Federal. . . . . . . . . . . . . . . $262.1 $120.6 $117.4
Foreign. . . . . . . . . . . . . . . 93.7 119.2 121.7
State. . . . . . . . . . . . . . . . 29.3 19.6 6.9
Total current. . . . . . . . . . . . 385.1 259.4 246.0
Deferred:
Federal and state. . . . . . . . . . (23.1) 51.3 8.0
Foreign. . . . . . . . . . . . . . . (20.3) (10.2) 3.5
Total deferred . . . . . . . . . . . (43.4) 41.1 11.5
Total income tax expense . . . . . . . $341.7 $300.5 $257.5
The difference between the U.S. statutory tax rate and the
Company's effective tax rate was due to the following:
1995 1994 1993
U.S. statutory tax rate. . . . . . . . . 35.0% 35.0% 35.0%
Increase (decrease) in taxes resulting
from:
Lower rates in other jurisdictions,
net . . . . . . . . . . . . . . . . . (10.7) (9.8) (11.2)
Research tax credit. . . . . . . . . . (.3) (.6) (.6)
All other, net . . . . . . . . . . . . .5 (.1) .8
Effective tax rate . . . . . . . . . . . 24.5% 24.5% 24.0%
The lower rates in other jurisdictions are primarily attributable
to certain employment and capital investment actions taken by the
Company. As a result, income from manufacturing activities in
these jurisdictions is subject to lower tax rates for years
through 2018.
As of December 31, 1995 and 1994, the Company had total deferred
tax assets of $426.6 and $340.7, respectively, and deferred tax
liabilities of $379.5 and $370.3, respectively. Valuation
allowances are not significant. Significant deferred tax assets at
December 31, 1995 and 1994 were for operating costs not currently
deductible for tax purposes and totaled $302.7 and $245.6,
respectively. Significant deferred tax liabilities at December 31,
1995 and 1994 were for depreciation differences, $207.4 and
$193.2, respectively, and retirement plans, $41.0 and $34.0,
respectively. Other current assets include deferred income taxes
of $300.9 and $209.3 at December 31, 1995 and 1994, respectively.
Deferred taxes are not provided on undistributed earnings of
foreign subsidiaries (considered to be permanent investments),
which at December 31, 1995, approximated $1,820.6. Determining
the tax liability that would arise if these earnings were remitted
is not practicable.
As of December 31, 1995, the U.S. Internal Revenue Service has
completed its examination of the Company's tax returns for all
years through 1988 and there are no unresolved issues outstanding
for those years.
Total income tax payments during 1995, 1994 and 1993 were $318.9,
$173.1 and $183.1, respectively.
At December 31, 1995, the Company had capital loss carry-forwards
for tax purposes of $28.9 that expire in 2000.
Commitments
Total rent expense amounted to $31.4 in 1995, $26.1 in 1994 and
$24.1 in 1993. Future minimum rental commitments on non-
cancelable operating leases as of December 31, 1995, range from
$20.2 in 1996 to $4.9 in 2000, with aggregate minimum lease
obligations of $8.9 due thereafter.
The Company has commitments related to future capital expenditures
totaling $129.8 as of December 31, 1995.
Legal and Environmental Matters
The Company has responsibilities for environmental clean-up under
various state, local and federal laws, including the Comprehensive
Environmental Response, Compensation and Liability Act, commonly
known as Superfund. At several Superfund sites (or equivalent
sites under state law), the Company is alleged to be a potentially
responsible party (PRP). The Company estimates its obligations
for clean-up costs for Superfund sites based on information
obtained from the federal Environmental Protection Agency, an
equivalent state 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,
1995 and 1994, and the related expenses incurred during the three
years ended December 31, 1995, were not material. Expected
insurance recoveries have not been considered in determining the
costs for environmental related liabilities. Management believes
that, except for the matter discussed in the following paragraph,
it is remote that any material liability in excess of the amounts
accrued will be incurred.
The Company is a defendant in more than 150 antitrust actions
commenced in state and federal courts by independent retail
pharmacies, chain retail pharmacies and consumers. 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
the federal cases is a class action on behalf of approximately
two-thirds of all retail pharmacies in the United States alleging
a price-fixing conspiracy. The Company has agreed, subject to
court approval, to settle this federal class action for a total of
$22.1 payable over three years. In the event that the court does
not approve the settlement, the class action is likely to go to
trial in mid-1996. Three of the state cases have been certified
as class actions. One is a class action on behalf of certain
retail pharmacies in California, and the other two are class
actions in California and Alabama, respectively, on behalf of
certain consumers of prescription medicine. Plaintiffs in all
cases seek treble damages and/or penalties 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, manufac-
turing and marketing of pharmaceutical and health care products
worldwide. Pharmaceutical products include prescription drugs 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
1995 1994 1993 1995 1994 1993
Pharmaceutical products. . . $4,471.7 $3,880.2 $3,528.5 $1,380.6 $1,204.4 $1,049.8
Health care products . . . . 632.7 656.4 700.6 153.6 158.9 135.8
Total sales and operating
profit. . . . . . . . . . . 5,104.4 4,536.6 4,229.1 1,534.2 1,363.3 1,185.6
General corporate
revenue and expense . . . . (81.9) (80.4) (64.3)
Interest expense . . . . . . (57.6) (56.2) (48.2)
Consolidated sales
and pre-tax profit. . . . . $5,104.4 $4,536.6 $4,229.1 $1,394.7 $1,226.7 $1,073.1
Identifiable Assets, Capital Expenditures, Depreciation and Amortization by Industry
Segment
Capital
Assets Expenditures
1995 1994 1993 1995 1994 1993
Pharmaceutical products. $3,608.7 $3,544.5 $3,276.1 $ 275.5 $243.8 $314.1
Health care products . . 373.2 395.2 408.7 17.4 21.5 24.2
Industry segment totals. 3,981.9 3,939.7 3,684.8 292.9 265.3 338.3
Corporate. . . . . . . . 682.7 386.0 632.1 .9 2.9 1.6
Consolidated assets,
capital expenditures,
depreciation and
amortization. . . . . . $4,664.6 $4,325.7 $4,316.9 $293.8 $268.2 $339.9
Depreciation and
Amortization
1995 1994 1993
Pharmaceutical products. $ 134.9 $ 121.2 $ 108.0
Health care products . . 16.9 18.2 17.8
Industry segment totals. 151.8 139.4 125.8
Corporate. . . . . . . . 5.3 5.2 5.1
Consolidated assets,
capital expenditures,
depreciation and
amortization. . . . . . $ 157.1 $ 144.6 $ 130.9
Sales, Operating Profit and Identifiable Assets by Geographic Area
Sales Profit
1995 1994 1993 1995 1994 1993
United States. . . . . . $2,804.9 $2,470.2 $2,212.7 $1,037.1 $ 887.2 $ 684.3
Europe, Middle
East and Africa . . . . 1,277.3 $1,045.7 936.9 264.1 235.5 218.4
Latin America. . . . . . 373.8 387.0 325.4 104.5 101.8 77.2
Canada, Pacific
Area and Asia . . . . . 648.4 633.7 754.1 128.5 138.8 205.7
Total sales,
operating profit
and identifiable
assets . . . . . . . . $5,104.4 $4,536.6 $4,229.1 $1,534.2 $1,363.3 $1,185.6
Assets
1995 1994 1993
United States. . . . . . $2,234.8 $2,344.2 $2,263.0
Europe, Middle
East and Africa . . . . 1,058.6 $ 887.5 689.2
Latin America. . . . . . 278.2 278.4 233.9
Canada, Pacific
Area and Asia . . . . . 410.3 429.6 498.7
Total sales,
operating profit
and identifiable
assets . . . . . . . . $3,981.9 $3,939.7 $3,684.8
/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
distribution 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.
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 manage-
ment'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 staff 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, 1995, 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/Richard J. Kogan
President and
Chief Executive Officer
/s/Jack L. Wyszomierski
Executive Vice President
and Chief Financial
Officer
/s/Thomas H. Kelly
Vice President
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,
1995 and 1994 and the related statements of consolidated income,
retained earnings and cash flows for each of the three years in
the period ended December 31, 1995. These financial statements
are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial state-
ments 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, 1995
and 1994 and the results of their operations and their cash flows
for each of the three years in the period ended December 31,
1995, in conformity with generally accepted accounting
principles.
As discussed in the Notes to Consolidated Financial Statements,
the Company changed, in 1993, its method of accounting for post-
retirement benefits other than pensions to conform with Statement
of Financial Accounting Standards No. 106.
/s/Deloitte & Touche LLP
Parsippany, New Jersey
February 14, 1996
COMMON SHARE DIVIDENDS AND MARKET DATA
During 1995, the Board of Directors increased the quarterly
dividend rate from $.255 per share to $.29 per share, a 14
percent increase. Dividends paid on common shares in 1995 and
1994 totaled $416.4 million and $379.4 million, respectively.
The following table reflects the quarterly dividends per share
paid over the last two years, restated for the effect of the 1995
2-for-1 stock split:
Quarter 1995 1994
1st $ .255 $ .225
2nd .29 .255
3rd .29 .255
4th .29 .255
$ 1.125 $ .99
The approximate number of holders of record of common shares as of
December 31, 1995, was 34,100.
The Company's common shares are listed and principally traded on the
New York Stock Exchange. The following table reflects the reported
high and low sale prices for the common shares in each of the calendar
quarters during the past two years, restated for the effect of the
1995 2-for-1 stock split:
1995 1994
Quarter High Low High Low
1st $ 39 7/16 $ 35 13/16 $34 9/16 $27 13/16
2nd 45 3/8 36 3/4 33 5/16 27 9/16
3rd 52 1/2 43 35 11/16 30 13/16
4th 60 5/8 51 3/4 37 13/16 34 15/16
__________________________________________________________
Schering-Plough Corporation and Subsidiaries
Six-Year Selected Financial & Statistical Data
(Dollars in millions, except per share figures)
1995 1994 1993 1992 1991 1990
Operating Results
Sales . . . . . . . . . . . . .$5,104.4 $4,536.6 $4,229.1 $3,944.6 $3,475.4 $3,194.9
Income before income taxes. . . 1,394.7 1,226.7 1,073.1 962.8 847.6 768.1
Income from continuing operations
before extraordinary item and
cumulative effect of
accounting changes . . . . . . 1,053.0 926.2 815.6 722.1 635.7 560.7
Discontinued operations . . . . (166.4) (4.2) 9.4 (2.1) 9.9 4.4
Extraordinary item. . . . . . . - - - (26.7) - -
Cumulative effect of accounting
changes. . . . . . . . . . . . - - (94.2) 27.1 - -
Net income. . . . . . . . . . . 886.6 922.0 730.8 720.4 645.6 565.1
Earnings per common share from
continuing operations before
extraordinary item and
cumulative effect of accounting
changes . . . . . . . . . . . 2.85 2.42 2.09 1.80 1.48 1.24
Discontinued operations . . . . (.45) (.01) .02 - .02 .01
Extraordinary item. . . . . . . - - - (.07) - -
Cumulative effect of accounting
changes. . . . . . . . . . . . - - (.24) .07 - -
Earnings per common share . . . 2.40 2.41 1.87 1.80 1.50 1.25
_____________________________________________________________________________________________
Investments
Research and development . . . $ 656.9 $ 610.1 $ 567.3 $ 510.5 $ 416.5 $ 370.5
Capital expenditures . . . . . 293.8 268.2 339.9 372.8 319.2 229.3
Financial Condition
Property, net . . . . . . . . .$2,098.9 $2,082.3 $1,967.7 $1,748.5 $1,490.4 $1,284.4
Total assets. . . . . . . . . . 4,664.6 4,325.7 4,316.9 4,156.6 4,013.2 4,103.1
Long-term debt. . . . . . . . . 87.1 185.8 182.3 184.1 753.6 182.9
Shareholders' equity. . . . . . 1,622.9 1,574.4 1,581.9 1,596.9 1,346.1 2,080.8
Net book value per common share 4.46 4.23 4.09 4.00 3.34 4.69
Financial Statistics
Income from continuing operations
before extraordinary item and
cumulative effect of accounting
changes as a percent of sales 20.6% 20.4% 19.3% 18.3% 18.3% 17.5%
Net income as a percent of sales 17.4% 20.3% 17.3% 18.3% 18.6% 17.7%
Return on average shareholders'
equity . . . . . . . . . . . . 55.5% 58.4% 46.0% 49.0% 37.7% 28.0%
Effective tax rate . . . . . . 24.5% 24.5% 24.0% 25.0% 25.0% 27.0%
Other Data
Cash dividends per common share $ 1.125 $ .99 $ .87 $ .75 $ .635 $ .533
Cash dividends on common shares 416.4 379.4 339.6 300.2 273.6 241.2
Depreciation and amortization . 157.1 144.6 130.9 124.5 118.0 111.2
Number of employees . . . . . . 20,100 20,000 20,300 19,800 19,000 18,500
Average common shares outstanding
(in millions) . . . . . . . . . 369.7 382.5 390.2 400.3 429.0 451.9
Actual common shares outstanding
at year end (in millions). . . . 364.2 372.0 387.1 399.0 403.6 444.0
Certain amounts for years prior to 1995 have been restated for the effect of discontinued
operations and a 2-for-1 stock split.
Quarterly Results of Operations
(Dollars in millions, except per share figures)
Three Months Ended March 31, June 30, September 30, December 31,
1995 1994 1995 1994 1995 1994 1995 1994
Sales . . . . . . . $1,224.2 $1,132.9 $1,332.5 $1,149.0 $1,256.8 $1,095.2 $1,290.9 $1,159.5
Gross profit . . . . 988.4 899.7 1,060.0 921.6 1,019.0 888.9 1,032.2 919.6
Income before income
taxes . . . . . . . 377.4 337.7 365.6 309.3 334.6 299.6 317.1 280.1
Income from continuing
operations. . . . . 284.9 255.0 276.1 233.5 252.6 226.2 239.4 211.5
Discontinued operations (6.3) (1.8) (160.1) 7.2 - (1.9) - (7.7)
Net income . . . . . 278.6 253.2 116.0 240.7 252.6 224.3 239.4 203.8
Earnings per common
share from continuing
operations . . . . .77 .66 .74 .61 .68 .59 .66 .56
Discontinued operations (.02) (.01) (.43) .02 - - - (.02)
Earnings per common
share . . . . . . . .75 .65 .31 .63 .68 .59 .66 .54
____________________________________________________________________________________________
<FN>
Certain amounts for 1994 have been restated for the effect of discontinued operations and a
2-for-1 stock split. Discontinued operations includes a loss on disposal of $156.2, net of a
tax benefit of $75.3, ($.42 per share), during the second quarter of 1995.
</FN>
APPENDIX TO EXHIBIT #13
Page 1 OF 2
The page preceding the management's discussion and analysis of
operations and financial condition of the 1995 annual report
to shareholders presents three bar charts. Across the bottom of
the page, beneath the charts, is a footnote stating that amounts
prior to 1995 have been restated for the effect of discontinued
operations. The following 3 sections provide the information
portrayed in the charts:
_______________________________________________________________
Title: Sales
The vertical axis is in millions of dollars starting at zero,
increasing in $1,000 million increments, ending at $6,000
million.
The horizontal axis is in years starting with 1991, ending with
1995.
The data points are:
1991 $3,475.4
1992 $3,944.6
1993 $4,229.1
1994 $4,536.6
1995 $5,104.4
_______________________________________________________________
Title: Research and Development
The vertical axis is in millions of dollars starting at zero,
increasing in $100 million increments, ending at $800 million.
The horizontal axis is in years starting with 1991, ending with
1995.
The data points are:
1991 $416.5
1992 $510.5
1993 $567.3
1994 $610.1
1995 $656.9
_______________________________________________________________
Page 2 of 2
APPENDIX TO EXHIBIT #13
_______________________________________________________________
Title: Capital Expenditures
The vertical axis is in millions of dollars starting at zero,
increasing in $50 million increments, ending at $400 million.
The horizontal axis is in years starting with 1991, ending with
1995.
The data points are:
1991 $319.2
1992 $372.8
1993 $339.9
1994 $268.2
1995 $293.8
_______________________________________________________________