UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1997
Commission file number 1-6571
SCHERING-PLOUGH CORPORATION
Incorporated in New Jersey 22-1918501
One Giralda Farms (I.R.S. Employer Identification No.)
Madison, N.J. 07940-1000 (201) 822-7000
(telephone number)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months, and (2) has been subject to
such filing requirements for the past 90 days.
YES X NO
Common Shares Outstanding as of March 31, 1997: 365,852,143
PART I. - FINANCIAL INFORMATION
Item 1. Financial Statements
SCHERING-PLOUGH CORPORATION AND SUBSIDIARIES
STATEMENTS OF CONSOLIDATED INCOME
(UNAUDITED)
(Dollars in millions, except per share figures)
Three Months
Ended
March 31
1997 1996
Sales . . . . . . . . . . . . . $1,568.1 $1,382.7
Costs and expenses:
Cost of sales. . . . . . . . . 289.3 262.7
Selling, general
and administrative. . . . . . 593.5 503.3
Research and development . . . 179.2 162.9
Other, net . . . . . . . . . . 9.0 21.2
1,071.0 950.1
Income before income taxes. . . 497.1 432.6
Income taxes. . . . . . . . . . 121.8 106.0
Net Income. . . . . . . . . . . 375.3 326.6
Earnings per common share . . . $ 1.03 $ .89
Dividends per common share. . . $ .33 $ .29
<FN>
See notes to consolidated financial statements.
SCHERING-PLOUGH CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
(Dollars in millions, except per share figures)
March 31, December 31,
1997 1996
Assets
Cash and cash equivalents . . . . . . . . $ 757.1 $ 535.1
Accounts receivable, net. . . . . . . . . 755.7 542.0
Inventories . . . . . . . . . . . . . . . 575.9 594.1
Prepaid expenses, deferred income
taxes and other current assets . . . . . 723.4 693.4
Total current assets. . . . . . . . . 2,812.1 2,364.6
Property, plant and equipment . . . . . . 3,374.8 3,362.5
Less accumulated depreciation . . . . . . 1,125.6 1,116.2
Property, net . . . . . . . . . . . . 2,249.2 2,246.3
Other assets. . . . . . . . . . . . . . . 795.0 787.2
$ 5,856.3 $ 5,398.1
Liabilities and Shareholders' Equity
Accounts payable. . . . . . . . . . . . . $ 548.7 $ 560.6
Short-term borrowings and current
portion of long-term debt. . . . . . . . 1,035.5 855.1
Other accrued liabilities . . . . . . . . 1,215.2 1,183.4
Total current liabilities . . . . . . 2,799.4 2,599.1
Long-term debt. . . . . . . . . . . . . . 46.0 46.4
Other long-term liabilities . . . . . . . 714.4 692.7
Shareholders' Equity:
Preferred shares - $1 par value
each; issued - none. . . . . . . . . . . - -
Common shares - $1 par value each; shares
issued: 1997 - 507,376,729
1996 - 507,368,360 . . . . . . . . . . . 507.4 507.4
Paid-in capital . . . . . . . . . . . . . 192.7 172.3
Retained earnings . . . . . . . . . . . . 5,335.4 5,080.6
Foreign currency translation
adjustment and other . . . . . . . . . . (177.7) (140.6)
Total . . . . . . . . . . . . . . . . 5,857.8 5,619.7
Less treasury shares, at cost -
1997, 141,524,586 shares;
1996, 142,001,799 shares . . . . . . . . 3,561.3 3,559.8
Total shareholders' equity. . . . . . 2,296.5 2,059.9
$ 5,856.3 $ 5,398.1
<FN>
See notes to consolidated financial statements.
SCHERING-PLOUGH CORPORATION AND SUBSIDIARIES
STATEMENTS OF CONSOLIDATED CASH FLOWS
FOR THE THREE MONTHS ENDED MARCH 31
(UNAUDITED)
(Dollars in millions)
1997 1996
Operating Activities:
Net Income. . . . . . . . . . . . . . . . $ 375.3 $ 326.6
Depreciation and amortization . . . . . . 46.6 42.3
Accounts receivable . . . . . . . . . . . (238.4) (149.9)
Inventories . . . . . . . . . . . . . . . (4.8) (27.9)
Prepaid expenses and other assets . . . . (63.7) (54.2)
Accounts payable and other liabilities . 74.0 146.0
Net cash provided by operating activities 189.0 282.9
Investing Activities:
Capital expenditures. . . . . . . . . . . (60.1) (48.9)
Proceeds from sales of investments. . . . 28.5 .4
Purchases of investments. . . . . . . . . (31.3) (7.4)
Other, net. . . . . . . . . . . . . . . . (3.0) 2.4
Net cash used for investing
activities . . . . . . . . . . . . . . . (65.9) (53.5)
Financing Activities:
Short-term borrowings, net. . . . . . . . 205.8 (106.5)
Common shares repurchased . . . . . . . . (2.7) -
Dividends paid to common shareholders . . (120.5) (105.9)
Other equity transactions, net. . . . . . 17.7 18.5
Net cash provided by (used for) financing
activities . . . . . . . . . . . . . . . 100.3 (193.9)
Effect of exchange rates on cash and
cash equivalents. . . . . . . . . . . . . (1.4) (.1)
Net increase in cash and cash equivalents . 222.0 35.4
Cash and cash equivalents, beginning
of period . . . . . . . . . . . . . . . . 535.1 321.4
Cash and cash equivalents, end of period . $ 757.1 $ 356.8
<FN>
See notes to consolidated financial statements.
SCHERING-PLOUGH CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(Dollars in millions, except per share figures)
Basis of Presentation
The unaudited financial statements included herein have been
prepared pursuant to the rules and regulations of the Securities
and Exchange Commission for reporting on Form 10-Q. Certain
information and footnote disclosures normally included in
financial statements prepared in accordance with generally
accepted accounting principles have been condensed or omitted
pursuant to such rules and regulations. The statements should be
read in conjunction with the accounting policies and notes to
consolidated financial statements included in the Company's 1996
Annual Report on Form 10-K.
In the opinion of management, the financial statements reflect
all adjustments necessary for a fair statement of the operations
for the interim periods presented.
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 do not have a material effect on the
determination of earnings per common share. The weighted-average
number of shares used in the computation of earnings per common
share for the three months ended March 31, 1997 and 1996 were
365,644,316 and 365,708,883, respectively.
On April 22, 1997, the Board of Directors of the Company
authorized a 2-for-1 stock split, and voted to increase the
number of authorized common shares from 600 million to 1.2
billion. Distribution of the split shares will be made on June
3, 1997, to shareholders of record at the close of business on
May 2, 1997. The number of shares and the per share amounts
included in these consolidated financial statements are presented
before giving effect to the stock split. Proforma earnings per
common share on a post-split basis for the three months ended
March 31, 1997 and 1996 would be $.51 and $.45, respectively.
In February 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards (SFAS) No. 128,
"Earnings per Share". The new standard revises certain
methodology and disclosure requirements for reporting earnings
per common share. The new standard will require the reporting of
two earnings per share figures on the face of income statements:
basic earnings per share and diluted earnings per share. SFAS
No. 128 must be adopted in the fourth quarter of 1997 with
earlier adoption prohibited. Basic earnings per share, for the
Company, is expected to be the same as reported earnings per
share. Diluted earnings per share is expected to be
substantially the same as fully diluted earnings per share
reported in an Exhibit to the Company's quarterly Form 10-Q's and
annual Form 10-K.
Inventories
Inventories consisted of: March 31, December 31,
1997 1996
Finished products . . . . . . . $ 249.1 $ 296.7
Goods in process. . . . . . . . 193.5 173.0
Raw materials and supplies. . . 133.3 124.4
Total inventories . . . . . . $ 575.9 $ 594.1
Sales
Segment sales for the three months ended March 31, 1997 and 1996
were as follows:
1997 1996
Pharmaceutical products . . . . $1,371.3 $1,197.9
Health care products. . . . . . 196.8 184.8
Consolidated sales. . . . . . $1,568.1 $1,382.7
Legal and Environmental Matters
The Company is involved in various claims and legal proceedings
of a nature considered normal to its business, including
environmental matters and product liability cases. The recorded
liabilities for these matters at March 31, 1997 were not
material. Management believes that, except for the matters
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 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 defendants'
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. In April 1997, certain of the plaintiffs
in the federal class action commenced another purported class
action in Federal District Court in Illinois against the Company
and the other defendants who settled the previous federal class
action. The complaint alleges that the defendants conspired not
to implement the settlement commitments following the settlement
discussed above. The complaint seeks solely injunctive relief
and the plaintiffs have moved to have the District Court set a
date for a hearing on a request for a preliminary injunction.
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.
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations
Results of Operations - three months ended March 31, 1997
compared with the corresponding period in 1996.
Sales
Consolidated sales for the first quarter increased $185.4 million
or 13 percent compared with the same period in 1996. Excluding
the effect of foreign currency exchange rate fluctuations,
consolidated sales grew 16 percent. This performance reflects
worldwide CLARITIN brand sales of $353 million in the first
quarter, compared with $237 million in 1996.
Domestic prescription pharmaceutical sales advanced 21 percent
for the first three months of 1997. Sales of allergy/respiratory
products increased 24 percent, due to continued strong growth of
the CLARITIN brand of nonsedating antihistamines and increases
for VANCENASE allergy products.
The domestic allergy/respiratory sales gain reflects a 44 percent
decline in sales of the PROVENTIL (albuterol) line of asthma
products, due to increased generic competition. Sales of the
PROVENTIL line totaled $65 million for the quarter, with metered-
dose inhalers contributing over 50 percent. The PROVENTIL line
has 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 generic inhaler in December
1995. 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.
U.S. sales of cardiovascular products grew 16 percent for the
quarter, reflecting market share gains for IMDUR, a once-daily
oral nitrate for angina.
Domestic sales of anti-infective and anticancer products declined
2 percent compared with 1996, primarily due to lower sales of
EULEXIN, a prostate cancer therapy, reflecting branded
competition. This decline in anti-infective and anticancer
products was moderated by increased utilization of INTRON A, the
Company's alpha interferon anticancer and antiviral agent, for
hepatitis and malignant melanoma. Sales of dermatological
products declined 1 percent for the quarter.
International ethical pharmaceutical product sales increased 6
percent for the first three months of 1997. Excluding the impact
of foreign currency exchange rate fluctuations, sales would have
risen 12 percent. Sales of allergy/respiratory products advanced
23 percent for the quarter, led by CLARITIN in most world markets
and other allergy products in Japan.
International anti-infective and anticancer product sales gained
11 percent in the quarter, primarily due to gains for INTRON A.
Sales of dermatological products grew 4 percent, benefiting from
higher sales of ELOCON, a mid-potency topical corticosteriod.
Cardiovascular product sales grew 3 percent.
Worldwide sales of animal health products rose 33 percent in the
first quarter, excluding foreign exchange rate fluctuations. The
sales increase was primarily in the U.S. where NUFLOR, a broad-
spectrum, multi-species antibiotic, was recently launched.
Sales of health care products increased 6 percent in the first
quarter. Footcare product sales rose 20 percent, primarily due
to the recent introductions of DYNA STEP and gel insoles, while
Suncare product sales increased 7 percent. Over-the-counter
product sales declined 8 percent due to the sales decline of the
CORRECTOL line of laxatives.
Income before income taxes increased 15 percent for the quarter
as compared with 1996, and represented 31.7 percent of sales
versus 31.3 percent last year.
Cost of sales as a percentage of sales declined to 18.4 percent
from 19.0 in 1996, principally the result of a favorable sales
mix of higher margin pharmaceutical products.
Selling, general and administrative expenses represented 37.8
percent of sales in the first quarter compared with 36.4 percent
last year. The increase in ratio was the result of increased
selling and promotional related spending, primarily for the
CLARITIN brand.
Research and development spending rose 10 percent in the quarter,
representing 11.4 percent of sales compared with 11.8 percent a
year ago. 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.
The effective tax rate was 24.5 percent in the first three months
of both 1997 and 1996.
Earnings per common share advanced 16 percent in the first
quarter to $1.03 from $.89 in 1996. Excluding the impact of
fluctuations in foreign currency exchange rates, earnings per
common share would have risen approximately 18 percent in the
quarter. In February 1997, the Financial Accounting Standards
Board issued Statement of Financial Accounting Standards (SFAS)
No. 128, "Earnings Per Share". For additional information, see
"Earnings Per Common Share" in the Notes to Consolidated
Financial Statements.
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 - three months ended March 31,
1997
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 and cash equivalents increased by $222.0 million in the
first three months of 1997, primarily due to cash provided by
operating activities of $189.0 million and the net increase in
short-term borrowings of $205.8 million which exceeded the
funding required for shareholder dividends of $120.5 million and
for capital expenditures of $60.1 million.
In September 1996, the Board of Directors authorized the
repurchase of $500 million of common shares. As of March 31,
1997 this program was approximately 74 percent complete.
In April 1997, the Board of Directors increased the quarterly
dividend 15 percent to $.38 per share from $.33, and authorized a
2-for-1 stock split of the Company's common shares. The
distribution of the split shares will be made on June 3, 1997, to
the shareholders of record at the close of business on May 2,
1997.
The Company's liquidity and financial resources continue to be
sufficient to meet its operating needs.
Cautionary Statements for Forward Looking Information
Management's discussion and analysis set forth above contains
certain forward looking statements, including statements
regarding the Company's financial position and results of
operations. These forward looking statements are based on
current expectations. Certain factors have been identified by
the Company in Exhibit 99.1 of the Company's December 31, 1996,
Form 10-K filed with the Securities and Exchange Commission,
which could cause the Company's actual results to differ
materially from expected and historical results. Exhibit 99.1
from the Form 10-K is incorporated by reference herein.
PART II OTHER INFORMATION
Item 1. Legal Proceedings
The fourth paragraph of Item 3, Legal Proceedings, of Part I of
the Company's Annual Report on Form 10-K for the fiscal year
ended December 31, 1996, relating to certain antitrust actions,
is incorporated herein by reference. In April 1997, certain of
the plaintiffs in the federal class action commenced another
purported class action in Federal District Court in Illinois
against the Company and the other defendants who settled the
previous federal class action. The complaint alleges that the
defendants conspired not to implement the settlement commitments
following the settlement discussed in the fourth paragraph of
Item 3. The complaint seeks solely injunctive relief and the
plaintiffs have moved to have the District Court set a date for a
hearing on a request for a preliminary injunction. The Company
believes the action is without merit and is defending itself
vigorously.
Item 4. Submission of Matters to a Vote of Security Holders
(a) The Annual Meeting of Shareholders was held on April 22,
1997.
(b) Not applicable.
(c) The designation by the Board of Directors of Deloitte &
Touche LLP to audit the books and accounts of the
Corporation for the year ended December 31, 1997 was
ratified by a vote of shares as follows:
FOR AGAINST ABSTAIN
324,682,098 527,777 736,936
All of the nominees for director were elected for a three year
term by a vote of shares, as follows:
FOR WITHHELD
David C. Garfield 322,376,044 3,570,767
Robert P. Luciano 322,494,229 3,452,582
H. Barclay Morley 322,412,009 3,534,802
Carl E. Mundy, Jr. 321,457,359 4,489,452
Patricia F. Russo 321,677,997 4,268,814
The 1997 Stock Incentive Plan, adopted by the Board of Directors
of the Corporation and as presented to the Shareholders on April
22, 1997, was adopted by a vote of shares as follows:
FOR AGAINST ABSTAIN
306,065,396 16,774,132 3,107,283
(d) None
Item 6. Exhibits and Reports on Form 8-K
a) Exhibits - The following Exhibits are filed with this
document:
Exhibit
Number Description
10(a) - Amended and Restated SERP Rabbi Trust
10(b) - Amendment to the Executive Incentive
Plan Trust Agreement
11 - Computation of Earnings Per Common Share
27 - Financial Data Schedule
b) Reports on Form 8-K:
No report has been filed during the three months ended
March 31, 1997.
SIGNATURE(S)
Pursuant to the requirements of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned thereunto duly authorized.
Schering-Plough Corporation
(Registrant)
Date May 2, 1997 /s/Thomas H. Kelly
Thomas H. Kelly
Vice President and Controller