Exhibit 13
Financial Section of the Company's 1996
Annual Report to Shareholder
Management's Discussion and Analysis of Operations and Financial
Condition
Sales
Consolidated sales in 1996 totaled $5.66 billion, an increase of
11 percent over 1995, due to volume growth of 13 percent tempered
by price decreases of 1 percent and unfavorable foreign exchange
rate fluctuations of 1 percent. This performance reflects
significant gains for the CLARITIN brand of nonsedating
antihistamines, which includes CLARITIN-D, a combination product
with a decongestant. Worldwide CLARITIN brand sales totaled
$1.15 billion in 1996, compared with $789 million in 1995.
Consolidated 1995 sales of $5.10 billion advanced 13 percent over
1994, reflecting volume growth of 10 percent and favorable
foreign exchange rate fluctuations of 3 percent. This increase
reflects worldwide CLARITIN brand sales growth of 56 percent in
1995.
Worldwide 1996 pharmaceutical sales of $5.05 billion rose 13
percent over 1995, due to volume growth of 15 percent tempered by
price declines of 1 percent and unfavorable foreign exchange rate
fluctuations of 1 percent. Worldwide sales of pharmaceutical
products in 1995 increased 15 percent over 1994, reflecting
volume growth of 12 percent and favorable foreign exchange rate
fluctuations of 3 percent.
Domestic prescription pharmaceutical product sales grew 23
percent in 1996. Sales of allergy/respiratory products increased
21 percent, due to continued strong growth of the CLARITIN brand
and increases for VANCENASE allergy and VANCERIL asthma products.
The allergy/respiratory sales gain reflects a 25 percent decline
in sales of the PROVENTIL (albuterol) line of asthma products,
due to increased generic competition. Sales of the PROVENTIL line
totaled $316 million in 1996, with metered-dose inhalers
contributing 65 percent. The PROVENTIL solution, syrup and tablet
formulations have been subject to generic competition and, in December
1995, generic metered-dose inhalers entered the market. In response,
the Company's generic pharmaceutical marketing subsidiary, Warrick
Pharmaceuticals, launched its own generic inhaler in December 1995.
While generic inhalers have significantly reduced branded PROVENTIL
inhaler sales, the Warrick inhaler has moderated the decline. In
December 1996, the Company further enhanced its position in the albuterol
asthma market by launching PROVENTIL HFA, a new metered-dose inhaler that
uses an advanced delivery system and a propellant free of ozone-damaging
chlorofluorocarbons. Competition from generic metered-dose inhalers
will, however, continue to negatively affect future sales and
profitability of the PROVENTIL (albuterol) line of asthma products.
Domestic sales of anti-infective and anticancer products rose 33
percent compared with 1995, due to increased utilization of
INTRON A, the Company's alpha interferon anticancer and antiviral
agent, for malignant melanoma and hepatitis C. Also contributing
to the sales increase was the 1996 first quarter launch of CEDAX,
a third-generation cephalosporin antibiotic. These increases
were tempered by lower sales of EULEXIN, a prostate cancer
therapy, due to branded competition. Sales of cardiovascular products
advanced 36 percent, reflecting significant market share
increases for IMDUR, an oral nitrate for angina, and K-DUR
potassium supplement. Dermatological product sales increased 11
percent, due to higher sales of LOTRISONE, an antifungal/anti-
inflammatory cream, and ELOCON, a mid-potency topical
corticosteroid.
Domestic prescription pharmaceutical sales in 1995 advanced 20
percent over 1994, led by gains in allergy/respiratory products,
primarily reflecting strong growth of the CLARITIN brand. Sales
growth of cardiovascular and anti-infective and anticancer
products was somewhat offset by lower dermatological product
sales.
In 1996, sales of international ethical pharmaceutical products
increased 4 percent. Excluding the impact of foreign exchange
rate fluctuations, sales would have risen approximately 6
percent.
International sales of allergy/respiratory products advanced 5
percent over 1995, led by growth for the CLARITIN brand, tempered
by lower sales of other allergy products in Japan. Sales of
dermatological products rose 8 percent, reflecting higher sales
of ELOCON. Sales of cardiovascular products were up slightly.
International sales of anti-infective and anticancer products
rose 7 percent in 1996, due primarily to gains for INTRON A.
LOSEC, an anti-ulcer treatment licensed from AB Astra, also contributed to
higher overall international sales.
In 1995, international ethical pharmaceutical sales, excluding
foreign exchange, increased 5 percent over 1994, reflecting gains
in all therapy areas. LOSEC also contributed to the overall
international sales growth in 1995.
Worldwide sales of animal health products increased 4 percent in
1996, excluding unfavorable foreign exchange rate fluctuations of 1
percent. The sales growth was driven by NUFLOR, a broad-spectrum,
multispecies antibiotic. Sales of animal health products in 1995
increased 11 percent over 1994, excluding foreign exchange.
Sales of health care products in 1996 declined 4 percent compared
with 1995, as volume declines of 6 percent were partially offset
by price increases of 2 percent. Over-the-counter (OTC) product
sales decreased 16 percent, primarily due to aggressive private-
label competition for allergy/cold products, while sun care sales
were down slightly. Foot care product sales rose 9 percent due
primarily to the 1996 launch of gel insoles and higher TINACTIN and
LOTRIMIN AF antifungal products sales.
In 1995, health care product sales declined 4 percent as volume
declines of 6 percent were partially offset by price increases of
2 percent. The sales decline largely reflected lower sales of
OTC products, primarily due to competition for vaginal antifungal
products.
Income Before Income Taxes
Income before income taxes totaled $1.61 billion in 1996, an
increase of 15 percent over 1995. In 1995, income before income
taxes of $1.39 billion grew 14 percent over $1.23 billion in
1994.
Summary of Costs and Expenses:
(Dollars in millions)
% Increase
1996 1995 1994 1996/95 1995/94
Cost of sales . . . . . . $1,077.8 $1,004.8 $ 906.8 7 % 11%
% of sales. . . . . . . . 19.1 % 19.7 % 20.0 %
Selling, general and
administrative. . . . . $2,209.1 $1,990.4 $1,755.5 11 % 13 %
% of sales . . . . . . . 39.1 % 39.0 % 38.7 %
Research and development. $ 722.8 $ 656.9 $ 610.1 10 % 8 %
% of sales . . . . . . . 12.8 % 12.9 % 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 1996 increased as
a percentage of sales compared with 1995, due to increased
promotional and selling-related spending primarily for the
CLARITIN brand, INTRON A and the domestic launch of CEDAX. The 1995
increase as a percentage of sales from 1994 reflects higher
promotional and selling-related spending for the CLARITIN brand and
INTRON A.
Research and development expenses increased $65.9 million, or 10
percent, to $722.8 million in 1996 and represented 12.8 percent, 12.9
percent and 13.4 percent of sales in 1996, 1995 and 1994, respectively.
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. The Company also acquired
Canji, Inc. in February 1996 to serve as its center for gene therapy
research and development.
Income Taxes
The Company's effective tax rate was 24.5 percent in 1996, 1995
and 1994. The effective tax rate for each period was lower than
the U.S. statutory income tax rate, principally due to tax
incentives in certain jurisdictions where manufacturing facilities are
located. For additional information, see "Income Taxes" in the Notes to
Consolidated Financial Statements.
Income From Continuing Operations
Income in 1996 increased 15 percent to $1.21 billion. Income in
1995 increased 14 percent over 1994. Differences in year-to-year
exchange rates reduced comparative income growth in 1996, but
increased it in 1995. After eliminating these exchange
differences, income would have risen approximately 18 percent in
1996 and 12 percent in 1995.
Discontinued Operations
In June 1995, the Company sold its contact lens business. For
additional information, see "Discontinued Operations" in the
Notes to Consolidated Financial Statements.
Earnings Per Common Share
Earnings per common share were as follows:
1996 1995 1994
Earnings per common share from
continuing operations $ 3.30 $ 2.85 $ 2.42
Discontinued operations -
loss from operations - (.03) (.01)
Discontinued operations - loss on
disposal - (.42) -
Earnings per common share $ 3.30 $ 2.40 $ 2.41
Average shares outstanding
(in millions) 367.7 369.7 382.5
Earnings per common share from continuing operations rose 16
percent in 1996 and 18 percent in 1995. Earnings per common
share increased at a higher rate than income due to the Company's
share repurchase programs. Fluctuations in year-to-year exchange
rates decreased comparative growth in earnings per common share
in 1996, but increased it in 1995. Excluding the impact of these
exchange rate differences, earnings per common share from
continuing operations would have increased approximately 19 percent and
16 percent in 1996 and 1995, respectively.
Over the past three years, the Board of Directors has authorized
several share repurchase programs. Under these programs,
approximately 5.8 million common shares were purchased in 1996,
9.9 million common shares in 1995 and 17.2 million common shares
in 1994. At year-end, the most recent $500 million program was
74 percent completed.
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.
Foreign Exchange and Inflation
Sales outside of the United States represented 42 percent of
worldwide sales in 1996 and 45 percent in 1995. Fluctuating
foreign exchange rates have affected sales and earnings, as
previously discussed. Sales and earnings growth in 1997 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, see "Financial Instruments" in the
Notes to Consolidated Financial Statements. 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, government agencies and other
buying groups 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.
The market for pharmaceutical products is competitive. The
Company's operations may be affected by technological advances of
competitors, patents granted to competitors, new products of
competitors, and generic competition as the Company's products
mature. In addition, patent positions can be highly uncertain
and an adverse result in a patent dispute can preclude
commercialization of products or negatively affect sales of
existing products. The effect on operations of competitive
factors and patent disputes cannot be predicted.
Uncertainties inherent in government regulatory approval processes,
including among other things delays in approval of
new products, may also affect the Company's operations. The effect on
operations of regulatory approval processes cannot be
predicted.
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 $1,458.5 million in
1996, $1,383.3 million in 1995 and $1,270.1 million in 1994.
Capital expenditures amounted to $324.5 million in 1996, $293.8
million in 1995 and $268.2 million in 1994. It is anticipated
that capital expenditures will approximate $350 million in 1997 and
include the cost to complete construction of a bulk chemical plant in
Singapore. Commitments for future capital expenditures totaled $82.9
million at December 31, 1996.
Common shares repurchased in 1996 totaled 5.8 million shares at a
cost of $388.0 million. In 1995, 9.9 million shares were repurchased for
$493.8 million, and in 1994, 17.2 million shares were repurchased at a cost
of $599.4 million.
Dividend payments of $474.0 million were made in 1996, compared
with $416.4 million in 1995 and $379.4 million in 1994. Dividends per
common share were $1.28 in 1996, up from $1.125 in
1995 and $.99 in 1994.
Short-term borrowings and current portion of long-term debt totaled $855.1
million at year-end 1996, $841.3 million in 1995 and $782.3 million in
1994. The 1995 increase was due to the reclassification of $100 million
for current maturities of long-term debt. In 1996, the Company funded the
repayment of current maturities of long-term debt through increased short-
term borrowings.
The Company's ratio of debt to total capital decreased to 30
percent in 1996 from 36 percent in 1995, resulting primarily from 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, 1996, the Company had $1,295 million in unused lines of
credit, including $1 billion from a multi-currency unsecured revolving
credit facility expiring in 2001 considered as 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, 1996.
Securities Litigation Reform Act
Safe Harbor Statement under the Private Securities Litigation
Reform Act of 1995: Certain matters discussed in this Annual
Report are forward-looking statements that involve risks and
uncertainties, including but not limited to economic, litigation,
competitive, regulatory, governmental and technological factors
affecting the Company's operations, markets, products, services
and prices, and other factors discussed in Exhibit 99.1 of the
Company's December 31, 1996 Form 10K filed 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, 1996 1995 1994
Sales . . . . . . . . . . . . . . . . . . . . . $5,655.8 $5,104.4 $4,536.6
Costs and expenses:
Cost of sales . . . . . . . . . . . . . . . . 1,077.8 1,004.8 906.8
Selling, general and administrative . . . . . 2,209.1 1,990.4 1,755.5
Research and development. . . . . . . . . . . 722.8 656.9 610.1
Other expense, net. . . . . . . . . . . . . . 39.7 57.6 37.5
Total costs and expenses . . . . . . . . . . 4,049.4 3,709.7 3,309.9
Income before income taxes. . . . . . . . . . . 1,606.4 1,394.7 1,226.7
Income taxes. . . . . . . . . . . . . . . . . 393.6 341.7 300.5
Income from continuing operations . . . . . . . 1,212.8 1,053.0 926.2
Discontinued operations:
Loss from operations . . . . . . . . . . . . . - (10.2) (4.2)
Loss on disposal . . . . . . . . . . . . . . . - (156.2) -
___________________________________________________________________________________
Net income. . . . . . . . . . . . . . . . . . . $1,212.8 $ 886.6 $ 922.0
Earnings per common share:
Continuing operations. . . . . . . . . . . . . $ 3.30 $ 2.85 $ 2.42
Discontinued operations:
Loss from operations . . . . . . . . . . . . - (.03) (.01)
Loss on disposal. . . . . . . . . . . . . . . - (.42) -
___________________________________________________________________________________
Earnings per common share . . . . . . . . . . . $ 3.30 $ 2.40 $ 2.41
Statements of Consolidated Retained Earnings
(Dollars in millions, except per share figures)
For The Years Ended December 31, 1996 1995 1994
Retained Earnings, Beginning of Year. . . . . . $4,341.8 $3,978.2 $3,435.6
Net income. . . . . . . . . . . . . . . . . . 1,212.8 886.6 922.0
Cash dividends on common shares (per share:
1996, $1.28; 1995, $1.125; and 1994, $.99) . (474.0) (416.4) (379.4)
Effect of 2-for-1 stock split . . . . . . . . - (106.6) -
___________________________________________________________________________________
Retained Earnings, End of Year. . . . . . . . . $5,080.6 $4,341.8 $3,978.2
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, 1996 1995 1994
Operating Activities:
Income from continuing operations. . . . . . . . . . $1,212.8 $1,053.0 $ 926.2
Depreciation and amortization. . . . . . . . . . . . 173.2 157.1 144.6
Accounts receivable. . . . . . . . . . . . . . . . . 1.6 11.3 75.2
Inventories. . . . . . . . . . . . . . . . . . . . . (111.9) (63.7) (34.1)
Prepaid expenses and other assets. . . . . . . . . . (144.4) (107.9) (122.2)
Accounts payable and other liabilities . . . . . . . 327.2 333.5 280.4
Net cash provided by operating activities. . . . . . 1,458.5 1,383.3 1,270.1
Investing Activities:
Capital expenditures . . . . . . . . . . . . . . . . (324.5) (293.8) (268.2)
Reduction of investments . . . . . . . . . . . . . . .6 45.3 181.0
Purchases of investments . . . . . . . . . . . . . . (77.9) (93.2) (37.1)
Other, net . . . . . . . . . . . . . . . . . . . . . (5.8) (1.8) (8.3)
Net cash used for investing activities (407.6) (343.5) (132.6)
Financing Activities:
Common shares repurchased. . . . . . . . . . . . . . (388.0) (493.8) (599.4)
Cash dividends paid to common shareholders . . . . . (474.0) (416.4) (379.4)
Net change in short-term borrowings. . . . . . . . . 113.0 (46.0) (292.1)
Repayment of long-term debt. . . . . . . . . . . . . (140.2) (1.4) (3.7)
Other equity transactions, net . . . . . . . . . . . 48.1 44.4 33.1
Other, net . . . . . . . . . . . . . . . . . . . . . 4.7 2.7 7.4
Net cash used for financing activities . . . . . . . (836.4) (910.5) (1,234.1)
Effect of exchange rates on cash and cash equivalents. (.8) (3.2) (4.2)
Net Cash Flow from Continuing Operations . . . . . . . 213.7 126.1 (100.8)
Discontinued operations. . . . . . . . . . . . . . . . - 79.7 (5.8)
Net Increase (Decrease) in Cash and Cash Equivalents . 213.7 205.8 (106.6)
Cash and Cash Equivalents, Beginning of Year . . . . . 321.4 115.6 222.2
Cash and Cash Equivalents, End of Year . . . . . . . . $ 535.1 $ 321.4 $ 115.6
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, 1996 1995
ASSETS
__________________________________________________________________________
Current Assets:
Cash and cash equivalents. . . . . . . . . . . $ 535.1 $ 321.4
Accounts receivable, less allowances:
1996, $73.0; 1995, $69.1 . . . . . . . . . . 542.0 569.3
Inventories. . . . . . . . . . . . . . . . . . 594.1 502.0
Prepaid expenses, deferred income taxes
and other current assets. . . . . . . . . . . 693.4 563.6
Total current assets . . . . . . . . . . . . . 2,364.6 1,956.3
Property, at cost:
Land . . . . . . . . . . . . . . . . . . . . . 41.3 41.4
Buildings and improvements . . . . . . . . . . 1,562.6 1,528.2
Equipment. . . . . . . . . . . . . . . . . . . 1,296.3 1,250.8
Construction in progress . . . . . . . . . . . 462.3 315.6
Total. . . . . . . . . . . . . . . . . . . . . 3,362.5 3,136.0
Less accumulated depreciation. . . . . . . . . 1,116.2 1,037.1
Property, net. . . . . . . . . . . . . . . . . 2,246.3 2,098.9
Other Assets. . . . . . . . . . . . . . . . . . . . 787.2 609.4
$5,398.1 $4,664.6
1996 1995
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Accounts payable . . . . . . . . . . . . . . . $ 560.6 $ 509.5
Short-term borrowings and current portion of
long-term debt . . . . . . . . . . . . . . . 855.1 841.3
U.S., foreign and state income taxes . . . . . 458.7 384.2
Accrued compensation . . . . . . . . . . . . . 205.3 205.1
Other accrued liabilities. . . . . . . . . . . 519.4 422.0
Total current liabilities. . . . . . . . . . . 2,599.1 2,362.1
Long-Term Liabilities:
Long-term debt . . . . . . . . . . . . . . . . 46.4 87.1
Deferred income taxes. . . . . . . . . . . . . 267.4 255.1
Other long-term liabilities. . . . . . . . . . 425.3 337.4
Total long-term liabilities. . . . . . . . . . 739.1 679.6
Shareholders' Equity:
Preferred shares - authorized 50,000,000
shares, $1 par value; issued - none . . . . . - -
Common shares - 600,000,000 authorized shares,
$1 par value; issued - 1996, 507,368,360;
1995, 502,965,382 . . . . . . . . . . . . . . 507.4 503.0
Paid-in capital. . . . . . . . . . . . . . . . 172.3 49.5
Retained earnings. . . . . . . . . . . . . . . 5,080.6 4,341.8
Foreign currency translation adjustment and
other . . . . . . . . . . . . . . . . . . . . (140.6) (103.9)
Total. . . . . . . . . . . . . . . . . . . . . 5,619.7 4,790.4
Less treasury shares, at cost - 1996,
142,001,799 shares; 1995,138,796,653 shares . 3,559.8 3,167.5
Total shareholders' equity . . . . . . . . . . 2,059.9 1,622.9
$5,398.1 $4,664.6
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.
Debt and Equity Investments
Investments, included in other non-current assets, consist of debt and
equity securities held primarily in non-qualified trusts to fund benefit
obligations. For purposes of Statement of Financial Accounting Standards
(SFAS) No. 115, all of the Company's investment securities are classified
as available for sale and, accordingly, are carried at fair value. Gains
and losses during 1996, 1995 and 1994, based on the specific identification
method, were not material. Unrealized gains and losses are included in
shareholders' equity until realized.
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 $149.2, $142.7, and $134.3 in 1996,
1995 and 1994, 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 $10.9, $4.0 and $6.0 in
1996, 1995 and 1994, 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.
Discontinued Operations
On June 28, 1995, the Company sold its 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. Contact lens sales during 1995 through the date of
disposition were $46.2. Sales for the year ended December 31, 1994, were
$120.5. Loss from discontinued operations for the years ended December
31, 1995 and 1994 is net of tax benefits of $7.0 and $9.3, 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, 1996 December 31, 1995
Carrying Estimated Carrying Estimated
Value Fair Value Value Fair Value
ASSETS:
Cash and cash equivalents $535.1 $535.1 $321.4 $321.4
Debt and equity investments 148.0 148.0 142.6 142.6
LIABILITIES:
Short-term borrowings 855.1 855.1 841.3 842.0
Long-term debt 46.4 46.4 87.1 88.9
Derivative Financial
Instruments:
Interest rate swap contracts - - 1.5 1.5
Foreign currency swap
contracts 47.9 64.5 64.5 81.3
</Table
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.
Derivatives
The Company has not used derivative financial instruments to manage overall
interest rate or 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 selected foreign exchange exposures that arise from
international operations, and
International cash management.
Hedging Selected 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:
1996 1995 1994
Europe, Middle East and Africa $287.9 $264.1 $235.5
Latin America 107.5 104.5 101.8
Canada, Pacific Area and Asia 132.0 128.5 138.8
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. Because 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.
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, 1996, the net
investment in the subsidiary was approximately 17.7 billion yen.
Long-term foreign currency interest rate swap contracts have been used to
hedge this net investment. One contract outstanding at December 31, 1996,
matures in 1997 and provides for the payment of 5 billion yen in exchange
for the receipt of $21.1. A second contract provides for the payment of
4.9 billion yen in exchange for the receipt of $20. This contract, which
matures in 2005, is callable annually by either party. The net liability
under these contracts is included in other accrued liabilities. Under a
third contract, which matures in 2002, the Company will pay 5 billion yen
and will receive $39.2. The net liability under this contract is included
in other long-term liabilities. There have been no purchases, sales or
maturities of foreign currency interest rate swap contracts during 1996 and
1995. 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 $.4 and a 1 percent stronger dollar-to-yen exchange rate
would favorably affect the estimated fair value by approximately $1.9.
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, 1996, 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, 1996, the market value of these arrangements was nil. At
December 31, 1995, the market value of these arrangements was a liability
of $1.5. It is estimated that a 50 basis point change in interest rate
structure could change the market value of these arrangements by
approximately $2.8.
The above interest rate swaps are recorded at market value with changes in
market value recorded in earnings. Annual net cash flows for payments and
receipts under the contracts are not material.
Commitments
Total rent expense amounted to $36.5 in 1996, $31.4 in 1995 and $26.1 in
1994. Future minimum rental commitments on non-cancelable operating leases
as of December 31, 1996, range from $21.4 in 1997 to $3.5 in 2001, with
aggregate minimum lease obligations of $7.4 due thereafter.
The Company has commitments related to future capital expenditures totaling
$82.9 as of December 31, 1996.
Borrowings
Short-term borrowings consist of commercial paper issued in the United
States, bank loans and notes payable. Commercial paper outstanding at
December 31, 1996 and 1995 was $784.3 and $689.0, respectively. Bank loans
and notes payable at December 31, 1996 and 1995 totaled $66.0 and $52.1,
respectively. The weighted- average interest rate for short-term
borrowings at December 31, 1996 and 1995 was 5.8 percent and 6.1 percent,
respectively.
As of December 31, 1996, the Company has a $1,000 multi-currency unsecured
revolving credit facility expiring in 2001 from a syndicate of financial
institutions. This facility is available for general corporate purposes
and is considered as support for the Company's commercial paper borrowings.
This line of credit does not require compensating balances; however, a
nominal commitment fee is paid. No amounts were outstanding under this
facility at December 31, 1996. In addition, the Company's foreign
subsidiaries had available $295 in unused lines of credit from various
financial institutions at December 31, 1996. 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:
1996 1995
Notes, 7.8%, due 1996 . . . . . . . . . . . . $ - $ 100.0
Industrial revenue bonds, due 2013: 1996,
3.8%; 1995, 3.8% - 12.0%. . . . . . . . . . . 40.0 80.0
Other . . . . . . . . . . . . . . . . . . . . 11.2 7.3
51.2 187.3
Current maturities. . . . . . . . . . . . . . (4.8) (100.2)
Total long-term debt. . . . . . . . . . . . . $ 46.4 $ 87.1
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, 1996, no debt
securities have been issued pursuant to this registration.
Interest Income and Interest Expense
Interest income for 1996, 1995 and 1994 was $32.8, $22.6 and $17.2,
respectively.
Interest expense, net of amounts capitalized as part of the construction
cost of property, plant and equipment, for 1996, 1995 and 1994 was $45.4,
$57.6 and $56.2, respectively. Interest costs of $10.8, $11.4 and $11.4 in
1996, 1995 and 1994, respectively, have been capitalized and included in
the cost of property, plant and equipment. Total cash payments for
interest, net of amounts capitalized, were $52.0, $56.3 and $54.9 in 1996,
1995 and 1994, 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. Option exercise prices equal the market price of
the common shares at their grant dates. Options expire not later than 10
years after the date of the grant. Standard options granted generally have
a one-year vesting term. Other options granted vest 20 percent per year
for five years starting in the fifth year after the date of 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 generally commencing one year from the date of the
award.
The Financial Accounting Standards Board issued Statement of Financial
Accounting Standards (SFAS) No. 123, "Accounting for Stock-Based
Compensation," in October 1995. Under SFAS No. 123, companies can either
continue to account for stock compensation plans pursuant to existing
accounting standards or elect to expense the value derived from using an
option pricing model such as Black-Scholes. The Company will continue to
apply existing accounting standards. However, SFAS No. 123 requires
disclosure of pro forma net income and earnings per share as if the Company
had adopted the expensing provisions of SFAS No. 123. Based on Black-
Scholes values, pro forma net income for 1996 and 1995 would be $1,196.5
and $882.8, respectively;
pro forma earnings per common share for 1996 and 1995 would be $3.25 and
$2.39, respectively.
The following table summarizes stock option activity over the past two
years under the current and prior plans:
Weighted-
Average
Number Exercise
of Shares Price
Outstanding at January 1, 1995 9,653,934 $23.83
Granted 1,911,920 $45.90
Exercised (1,743,223) $25.08
Canceled or expired (99,854) $33.44
Outstanding at December 31, 1995 9,722,777 $28.44
Granted 3,097,374 $57.44
Exercised (2,404,461) $22.83
Canceled or expired (276,312) $41.55
Outstanding at December 31, 1996 10,139,378 $38.28
Options exercisable at December 31, 1995 6,346,127 $24.64
Options exercisable at December 31, 1996 5,474,076 $27.83
In 1996 and 1995, the Company awarded deferred stock units totaling 881,030
and 824,560, respectively. The weighted-average fair value of these
deferred stock units was $56.07 and $39.37 per unit in 1996 and 1995,
respectively. The expense recorded in 1996 and 1995 for deferred stock
units was $26.9 and $23.4, respectively.
The weighted-average Black-Scholes value per option granted in 1996 and
1995 was $12.43 and $11.28, respectively.
The following weighted-average assumptions were used in the Black-Scholes
option pricing model for options granted in 1996 and 1995:
1996 1995
Dividend yield 2.8% 2.8%
Volatility 20% 20%
Risk-free interest rate 5.7% 6.6%
Expected term of options (in years) 5 5
For options outstanding and exercisable at December 31, 1996, the exercise
price ranges and average remaining lives were:
Options Outstanding Options Exercisable
Weighted- Weighted- Weighted-
Range of Number Average Average Number Average
Exercise Outstanding Remaining Exercise Exercisable Exercise
Prices at 12/31/96 Life Price at 12/31/96 Price
$12 to $29 3,791,558 4 $22.62 3,027,558 $23.07
$30 to $51 2,586,518 8 $33.72 2,446,518 $33.71
$52 to $68 3,761,302 9 $57.20 - -
10,139,378 7 $38.28 5,474,076 $27.83
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 $125.00 for $62.50. 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 (other than such person or
members of such group) 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, 1994. . . $251.5 $ 80.9 58.0 $2,069.9
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 -
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
Stock incentive plans. . . . . - 92.4 (2.6) 4.3
Settlement of warrants . . . . 3.4 (23.1) - -
Purchase of treasury shares. . - - 5.8 388.0
Shares issued for purchase of
Canji, Inc. . . . . . . . . 1.0 53.5 - -
Balance at December 31, 1996. . $507.4 $172.3 142.0 $3,559.8
</Table
Inventories
Year-end inventories consisted of the following:
1996 1995
Finished products . . . . . . . . . . . . . . $296.7 $213.2
Goods in process. . . . . . . . . . . . . . . 173.0 179.4
Raw materials and supplies. . . . . . . . . . 124.4 109.4
Total inventories . . . . . . . . . . . . . . $594.1 $502.0
Inventories valued on a last-in, first-out basis comprised approximately 45
percent and 39 percent of total inventories at December 31, 1996 and 1995,
respectively. The estimated replacement cost of total inventories at
December 31, 1996 and 1995 was $644.5 and $549.7, respectively.
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 for all Company-sponsored plans
were as follows:
1996 1995 1994
Service cost - benefits earned during
the year. . . . . . . . . . . . . . . $ 37.1 $ 29.1 $ 32.2
Interest cost on projected benefit
obligations . . . . . . . . . . . . . 49.6 47.0 42.0
Actual return on plan assets . . . . . (98.8) (152.8) .5
Net amortization and deferral . . . . . 18.5 78.8 (68.4)
Net pension expense . . . . . . . . . . $ 6.4 $ 2.1 $ 6.3
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 was as follows:
Over-funded Under-funded
plans plans
1996 1995 1996 1995
Projected benefit obligations:
Accumulated benefit obligations,
including vested benefits of
$604.5 in 1996 and $571.4 in 1995. . . $519.9 $532.4 $116.3 $ 83.9
Effect of future salary increases. . . 87.9 85.6 30.3 25.8
Total projected benefit obligations . . . 607.8 618.0 146.6 109.7
Plan assets at fair value,
primarily stocks and bonds. . . . . . . 876.9 822.4 36.1 17.3
Plan assets over (under) projected
benefit obligations . . . . . . . . . . 269.1 204.4 (110.5) (92.4)
Unrecognized net transition (asset)
liability . . . . . . . . . . . . . . . (67.2) (77.4) 4.3 6.1
Unrecognized prior service cost . . . . . 5.7 5.6 5.3 7.6
Unrecognized net (gain) loss. . . . . . . (69.9) (9.8) 34.2 20.9
Net pension asset (liability) . . . . . . $137.7 $122.8 $(66.7) $(57.8)
</Table
In addition to the plan assets indicated above, at December 31, 1996 and
1995, securities of $70.8 and $64.5, 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 7.5 percent at December 31, 1996, and 7.0
percent at December 31, 1995. The weighted-average discount rate for the
Company's non-U.S. plans was 6.7 percent at December 31, 1996, and 7.1
percent at December 31, 1995. The weighted-average rate of increase in
future compensation levels for all plans was 4.2 percent at December 31,
1996 and 1995. The weighted-average expected long-term rate of return on
plan assets was approximately 10 percent for both years.
The 1996 discount rate change reduced the total projected benefit
obligation by approximately $39.1. The remaining change reflects 1996
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 $59.9, $57.8, and $56.4 in
1996, 1995 and 1994, respectively.
Other Post-retirement Benefits
The Company provides post-retirement health care and other benefits to its
eligible U.S. 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.
The components of net post-retirement benefit expense (income) were as
follows:
1996 1995 1994
Service cost - benefits earned during the year. . . $ 4.9 $ 3.9 $ 5.7
Interest cost on accumulated post-retirement
benefit obligation . . . . . . . . . . . . . . . . 11.1 10.7 10.3
Actual return on plan assets. . . . . . . . . . . . (21.9) (35.4) 2.0
Net deferral. . . . . . . . . . . . . . . . . . . . 6.8 20.3 (15.5)
Post-retirement benefit expense (income). . . . . . $ .9 $ (.5) $ 2.5
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:
1996 1995
Accumulated post-retirement benefit
obligation attributable to:
Retirees. . . . . . . . . . . . . . . . . . . . . . $ 84.6 $83.4
Fully eligible active plan participants . . . . . . 24.5 30.1
Other active plan participants. . . . . . . . . . . 46.8 50.4
Accumulated post-retirement benefit obligation. . . . . 155.9 163.9
Plan assets at fair value, primarily stocks and bonds . 191.6 179.4
Plan assets in excess of accumulated post-retirement
benefit obligation. . . . . . . . . . . . . . . . . . 35.7 15.5
Unrecognized net gain . . . . . . . . . . . . . . . . . (44.2) (23.1)
Accrued post-retirement benefit liability . . . . . . . $ (8.5) $(7.6)
The assumed health care cost trend rates used for measurement purposes were
9.0 percent for 1997, trending down to 5.0 percent by 2003. The weighted-
average discount rate used was 7.5 percent at December 31, 1996, and 7.0
percent at December 31, 1995. The weighted-average expected long-term rate
of return on plan assets was 9 percent at December 31, 1996 and 1995.
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 1993, the Company fully funded
its initial accumulated benefit obligation. Future funding is at the
discretion of the Company.
The 1996 discount rate change reduced the accumulated benefit obligation by
approximately $9.6.
At December 31, 1996, a 1 percent increase in the assumed health care cost
trend rate would increase the combined service and interest cost by
approximately 15 percent and the accumulated post-retirement benefit
obligation by approximately 11 percent.
Income Taxes
U.S. and foreign operations contributed to income before income taxes as
follows:
1996 1995 1994
United States. . . . . . . . . . . . . $1,090.6 $ 916.7 $ 765.6
Foreign. . . . . . . . . . . . . . . . 515.8 478.0 461.1
Total income before income taxes . . . $1,606.4 $1,394.7 $1,226.7
The components of income tax expense were as follows:
1996 1995 1994
Current:
Federal. . . . . . . . . . . . . . . $296.5 $262.1 $120.6
Foreign. . . . . . . . . . . . . . . 122.0 93.7 119.2
State. . . . . . . . . . . . . . . . 13.7 29.3 19.6
Total current. . . . . . . . . . . . 432.2 385.1 259.4
Deferred:
Federal and state. . . . . . . . . . (24.5) (23.1) 51.3
Foreign. . . . . . . . . . . . . . . (14.1) (20.3) (10.2)
Total deferred . . . . . . . . . . . (38.6) (43.4) 41.1
Total income tax expense . . . . . . . $393.6 $341.7 300.5
The difference between the U.S. statutory tax rate and the Company's
effective tax rate was due to the following:
1996 1995 1994
U.S. statutory tax rate. . . . . . . . . 35.0% 35.0% 35.0%
Increase (decrease) in taxes resulting
from:
Lower rates in other jurisdictions,
net . . . . . . . . . . . . . . . . . (10.3) (10.7) (9.8)
Research tax credit. . . . . . . . . . (.4) (.3) (.6)
All other, net . . . . . . . . . . . . .2 .5 (.1)
Effective tax rate . . . . . . . . . . . 24.5% 24.5% 24.5%
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 2010.
As of December 31, 1996 and 1995, the Company had total deferred tax assets
of $485.3 and $426.6, respectively, and deferred tax liabilities of $406.7
and $379.5, respectively. Valuation allowances are not significant.
Significant deferred tax assets at December 31, 1996 and 1995 were for
operating costs not currently deductible for tax purposes and totaled $374.2
and $302.7, respectively. Significant deferred tax liabilities at December
31, 1996 and 1995 were for depreciation differences, $219.0 and $207.4,
respectively, and retirement plans, $47.0 and $41.0, respectively. Other
current assets include deferred income taxes of $344.5 and $300.9 at
December 31, 1996 and 1995, respectively.
Deferred taxes are not provided on undistributed earnings of foreign
subsidiaries (considered to be permanent investments), which at December 31,
1996, approximated $2,181.7. Determining the tax liability that would arise
if these earnings were remitted is not practicable.
As of December 31, 1996, 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 1996, 1995 and 1994 were $306.2, $318.9 and
$173.1, respectively.
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, 1996 and
1995, and the related expenses incurred during the three years ended
December 31, 1996, were not material. Expected insurance recoveries have
not been considered in determining the costs for environmental related
liabilities. Management believes that, except for the matters discussed in
the following paragraphs, it is remote that any material liability in
excess of the amounts accrued will be incurred.
The Company is a defendant in more than 160 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 to settle the
federal class action for a total of $22.1 payable over three years. The
settlement provides, among other things, that the Company shall not refuse
to grant discounts on brand-name prescription drugs to a retailer based
solely on its status as a retailer and that, to the extent a retailer can
demonstrate its ability to affect market share of a Company brand name
prescription drug in the same manner as a managed care organization with
which the retailer competes, it will be entitled to negotiate similar
incentives subject to the rights, obligations, exemptions and defenses of
the Robinson-Patman Act and other laws and regulations. The District Court
approved the settlement of the federal class action on June 21, 1996. In
early July, the Seventh Circuit Court of Appeals agreed to review before
trial the District Court's denial of defendant's summary judgment motion
seeking dismissal of all claims by indirect purchasers of pharmaceutical
products in all remaining cases before the District Court. In addition, the
Seventh Circuit Court of Appeals will hear an appeal by the plaintiffs from
the grant of summary judgment to the wholesaler defendants and an appeal by
certain plaintiffs from the approval of the settlement by the District
Court. Four of the state antitrust cases have been certified as class
actions. Two are class actions on behalf of certain retail pharmacies in
California and Wisconsin, and the other two are class actions in California
and the District of Columbia, on behalf of certain consumers of
prescription medicine. Plaintiffs seek treble damages in an unspecified
amount and an injunction against the allegedly unlawful conduct. The
Company believes that all the antitrust actions are without merit and is
defending itself vigorously against all such claims.
On March 13, 1996, the Company was notified that the United States Federal
Trade Commission (FTC) is investigating whether the Company, along with
other pharmaceutical companies, conspired to fix prescription drug prices.
The Company has provided a substantial amount of documentation to the FTC.
The Company vigorously denies that it has engaged in any price-fixing
conspiracy.
The Company is a defendant in a state court action in Texas brought by
Foxmeyer Health Corporation, the parent of a pharmaceutical wholesaler that
filed for bankruptcy in August 1996, against another pharmaceutical
wholesaler and 11 pharmaceutical companies alleging that the defendants
conspired to drive the plaintiff out of business. Plaintiff is seeking
damages in the amount of $400. The Company believes that this action is
without merit and is defending itself vigorously against all claims.
Consistent with trends in the pharmaceutical industry, the Company is self-
insured for certain events
Quarterly results of operations (Unaudited)
Three Months Ended March 31, June 30, September 30, December 31,
1996 1995 1996 1995 1996 1995 1996 1995
Sales. . . . . . $1,382.7 $1,224.2 $1,476.6 $1,332.5 $1,382.2 $1,256.8 $1,414.3 $1,290.9
Cost of sales. . 262.7 235.8 287.0 272.5 257.7 237.8 270.4 258.7
Gross profit . . $1,120.0 $ 988.4 $1,189.6 $1,060.0 $1,124.5 $1,019.0 $1,143.9 $1,032.2
Selling, general
and
administrative . 503.3 455.8 578.6 511.9 562.7 509.7 564.5 513.0
Research and
development . . 162.9 147.2 177.9 162.1 182.0 165.8 200.0 181.8
Other, net . . . 21.2 8.0 13.1 20.4 (6.6) 8.9 12.0 20.3
Income before
income taxes. . 432.6 377.4 420.0 365.6 386.4 334.6 367.4 317.1
Income taxes . . 106.0 92.5 102.9 89.5 94.7 82.0 90.0 77.7
Income from
continuing
operations. . . 326.6 284.9 317.1 276.1 291.7 252.6 277.4 239.4
Discontinued
operations: . . - (6.3) - (160.1) - - - -
Net income . . . $ 326.6 $ 278.6 $ 317.1 $ 116.0 $ 291.7 $ 252.6 $ 277.4 $ 239.4
Earnings per
common share
from continuing
operations. . . $ .89 $ .77 $ .86 $ .74 $ .79 $ .68 $ .76 $ .66
Discontinued
operations . . - (.02) - (.43) - - - -
Earnings per
common share . $ .89 $ .75 $ .86 $ .31 $ .79 $ .68 $ .76 $ .66
Common shares
outstanding at
period end (in
millions) 368.4 372.1 369.7 372.3 369.4 367.6 365.4 364.2
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.
</Table
Business Segment Data
Schering-Plough Corporation is a holding company whose subsidiaries are
engaged in the discovery, development, manufacturing and marketing of
pharmaceutical and health care products worldwide. Pharmaceutical products
include prescription drugs 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
1996 1995 1994 1996 1995 1994
Pharmaceutical products. . . $5,049.2 $4,471.7 $3,880.2 $1,591.7 $1,380.6 $1,204.4
Health care products . . . . 606.6 632.7 656.4 138.6 153.6 158.9
Total sales and operating
profit. . . . . . . . . . . 5,655.8 5,104.4 4,536.6 1,730.3 1,534.2 1,363.3
General corporate
revenue and expense . . . . (78.5) (81.9) (80.4)
Interest expense . . . . . . (45.4) (57.6) (56.2)
Consolidated sales
and pre-tax profit. . . . . $5,655.8 $5,104.4 $4,536.6 $1,606.4 $1,394.7 $1,226.7
Identifiable Assets, Capital Expenditures, Depreciation and Amortization by Industry Segment
Capital Depreciation and
Assets Expenditures Amortization
1996 1995 1994 1996 1995 1994 1996 1995 1994
Pharmaceutical
products. . . $4,099.4 $3,608.7 $3,544.5 $ 308.1 $ 275.5 $ 243.8 $ 152.0 $ 134.9 $ 121.2
Health care
products. . . 374.5 373.2 395.2 14.0 17.4 21.5 15.9 16.9 18.2
Industry
segment
totals. . . . 4,473.9 3,981.9 3,939.7 322.1 292.9 265.3 167.9 151.8 139.4
Corporate. . . 924.2 682.7 386.0 2.4 .9 2.9 5.3 5.3 5.2
Consolidated
assets,
capital
expenditures,
depreciation
and
amortization. $5,398.1 $4,664.6 $4,325.7 $ 324.5 $ 293.8 $ 268.2 $ 173.2 $ 157.1 $ 144.6
Sales, Operating Profit and Identifiable Assets by Geographic Area
Sales Profit Assets
1996 1995 1994 1996 1995 1994 1996 1995 1994
United States.$3,283.4 $2,804.9 $2,470.2 $1,202.9 $1,037.1 $ 887.2 $2,472.2$2,234.8 $2,344.2
Europe, Middle
East & Africa 1,375.9 1,277.3 1,045.7 287.9 264.1 235.5 1,159.4 1,058.6 887.5
Latin America. 385.0 373.8 387.0 107.5 104.5 101.8 303.8 278.2 278.4
Canada, Pacific
Area & Asia . 611.5 648.4 633.7 132.0 128.5 138.8 538.5 410.3 429.6
Total sales,
operating profit
& identifiable
assets. . . .$5,655.8 $5,104.4 $4,536.6 $1,730.3 $1,534.2 $1,363.3 $4,473.9 $3,981.9$3,939.7
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
certain countries 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 management's authorization, and fraudulent financial
reporting practices are prevented or detected. In establishing and
maintaining this system, judgments are required to assess and balance the
relative cost versus the expected benefit of a given control.
The Company's internal accounting control system is clearly documented,
provides for careful selection and training of supervisory and management
personnel, and also requires appropriate segregation of responsibilities
and delegation of authority. Formal policies and procedures are maintained
and systematically disseminated throughout the Company. In addition, the
Company maintains a corporate code of conduct for purposes of determining
possible conflicts of interest, compliance with laws and confidentiality of
proprietary information.
The Company's independent auditors, Deloitte & Touche LLP, audit Schering-
Plough's consolidated financial statements. They evaluate the Company's
internal accounting controls and perform tests of procedures and accounting
records to enable them to render their report. In addition, Schering-
Plough has an internal audit function that assists management in
discharging its responsibilities. The internal audit staff, under the
direction of the 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, 1996, 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 Jay Kogan /s/Jack L. Wyszomierski /s/Thomas H. Kelly
President and Executive Vice President Vice President
Chief Executive Officer and Chief Financial and Controller
Officer
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, 1996 and 1995 and
the related statements of consolidated income, retained earnings and cash
flows for each of the three years in the period ended December 31, 1996.
These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used
and significant estimates made by management, as well as evaluating the
overall financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in
all material respects, the financial position of Schering-Plough
Corporation and subsidiaries at December 31, 1996 and 1995 and the results
of their operations and their cash flows for each of the three years in the
period ended December 31, 1996, in conformity with generally accepted
accounting principles.
/s/Deloitte & Touche LLP
Parsippany, New Jersey
February 14, 1997
COMMON SHARE DIVIDENDS AND MARKET DATA
During 1996, the Board of Directors increased the quarterly dividend rate
from $.29 per share to $.33 per share, a 14 percent increase. Dividends
paid on common shares in 1996 and 1995 totaled $474.0 million and $416.4
million, respectively. The following table reflects the quarterly
dividends per share paid over the last two years.
Quarter 1996 1995
1st $ .29 $ .255
2nd .33 .29
3rd .33 .29
4th .33 .29
$ 1.28 $ 1.125
The approximate number of holders of record of common shares as of December 31,
1996, was 35,000.
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.
1996 1995
Quarter High Low High Low
1st $ 61 3/8 $ 51 1/2 $ 39 7/16 $ 35 13/16
2nd 62 3/4 53 1/2 45 3/8 36 3/4
3rd 63 1/8 55 52 1/2 43
4th 72 1/4 62 60 5/8 51 3/4
__________________________________________________________
Schering-Plough Corporation and Subsidiaries
Six-Year Selected Financial & Statistical Data(Dollars in millions, except per share figures)
1996 1995 1994 1993 1992 1991
Operating Results
Sales . . . . . . . . . . . . . $5,655.8 $5,104.4 $4,536.6 $4,229.1 $3,944.6 $3,475.4
Income before income taxes. . . 1,606.4 1,394.7 1,226.7 1,073.1 962.8 847.6
Income from continuing operations
before extraordinary item and
cumulative effect of
accounting changes . . . . . . 1,212.8 1,053.0 926.2 815.6 722.1 635.7
Discontinued operations . . . . - (166.4) (4.2) 9.4 (2.1) 9.9
Extraordinary item. . . . . . . - - - - (26.7) -
Cumulative effect of accounting
changes. . . . . . . . . . . . - - - (94.2) 27.1 -
Net income. . . . . . . . . . . 1,212.8 886.6 922.0 730.8 720.4 645.6
Earnings per common share from
continuing operations before
extraordinary item and cumulative
effect of accounting changes . 3.30 2.85 2.42 2.09 1.80 1.48
Discontinued operations . . . . - (.45) (.01) .02 - .02
Extraordinary item. . . . . . . - - - - (.07) -
Cumulative effect of accounting
changes. . . . . . . . . . . . - - - (.24) .07 -
Earnings per common share . . . 3.30 2.40 2.41 1.87 1.80 1.50
___________________________________________________________________________________________
Investments
Research and development . . . $ 722.8 $ 656.9 $ 610.1 $ 567.3 $ 510.5 $ 416.5
Capital expenditures . . . . . 324.5 293.8 268.2 339.9 372.8 319.2
Financial Condition
Property, net . . . . . . . . . $2,246.3 $2,098.9 $2,082.3 $1,967.7 $1,748.5 $1,490.4
Total assets. . . . . . . . . . 5,398.1 4,664.6 4,325.7 4,316.9 4,156.6 4,013.2
Long-term debt. . . . . . . . . 46.4 87.1 185.8 182.3 184.1 753.6
Shareholders' equity. . . . . . 2,059.9 1,622.9 1,574.4 1,581.9 1,596.9 1,346.1
Net book value per common share 5.64 4.46 4.23 4.09 4.00 3.34
Financial Statistics
Income from continuing operations
before extraordinary item and
cumulative effect of accounting
changes as a percent of sales. 21.4% 20.6% 20.4% 19.3% 18.3% 18.3%
Net income as a percent of sales 21.4% 17.4% 20.3% 17.3% 18.3% 18.6%
Return on average shareholders'
equity . . . . . . . . . . . . 65.9% 55.5% 58.4% 46.0% 49.0% 37.7%
Effective tax rate . . . . . . 24.5% 24.5% 24.5% 24.0% 25.0% 25.0%
Other Data
Cash dividends per common share $ 1.28 $ 1.125 $ .99 $ .87 $ .75 $ .635
Cash dividends on common shares 474.0 416.4 379.4 339.6 300.2 273.6
Depreciation and amortization . 173.2 157.1 144.6 130.9 124.5 118.0
Number of employees . . . . . . 20,600 20,100 20,000 20,300 19,800 19,000
Average common shares outstanding
(in millions) . . . . . . . . . 367.7 369.7 382.5 390.2 400.3 429.0
Common shares outstanding
at year-end (in millions). . . . 365.4 364.2 372.0 387.1 399.0 403.6
</Table
APPENDIX TO EXHIBIT #13
Page 1 OF 2
The page preceding the management's discussion and analysis of operations
and financial condition of the 1996 annual report to shareholders presents
three bar charts. The following three 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 1992, ending with 1996.
The data points are:
1992 $3,944.6
1993 $4,229.1
1994 $4,536.6
1995 $5,104.4
1996 $5,655.8
- ---------------------------------------------------------------
Title: Research and Development
The vertical axis is in millions of dollars starting at zero, increasing in
$125 million increments, ending at $750 million. The horizontal axis is in
years starting with 1992, ending with 1996.
The data points are:
1992 $510.5
1993 $567.3
1994 $610.1
1995 $656.9
1996 $722.8
_______________________________________________________________
APPENDIX TO EXHIBIT #13
Page 2 of 2
_____________________________________________________
Title: Capital Expenditures
The vertical axis is in millions of dollars starting at zero, increasing in
$75 million increments, ending at $450 million. The horizontal axis is in
years starting with 1992, ending with 1996.
The data points are:
1992 $372.8
1993 $339.9
1994 $268.2
1995 $293.8
1996 $324.5
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