Exhibit 13
Financial Section of the Company's 1997
Annual Report to Shareholders
Management's Discussion and Analysis of Operations and Financial
Condition
Sales
Consolidated sales in 1997 totaled $6.8 billion, an increase of
20 percent over 1996, due to volume growth of 20 percent and
price increases of 3 percent, tempered by unfavorable foreign
exchange rate fluctuations of 3 percent. In June 1997, the
Company purchased the worldwide animal health operations of
Mallinckrodt Inc. Excluding the acquisition of Mallinckrodt,
consolidated sales amounted to $6.6 billion. The consolidated
sales increase reflects significant gains for the CLARITIN brand
of nonsedating antihistamines. Worldwide CLARITIN brand sales
totaled $1.7 billion in 1997 compared with $1.2 billion in 1996.
Consolidated 1996 sales of $5.7 billion advanced 11 percent over
1995, reflecting volume growth of 13 percent moderated by price
decreases of 1 percent and unfavorable foreign exchange rate
fluctuations of 1 percent. This increase reflects worldwide
CLARITIN brand sales growth of 46 percent in 1996.
Worldwide 1997 pharmaceutical sales of $6.1 billion rose 21
percent over 1996, due to volume growth of 22 percent and price
increases of 3 percent, moderated by unfavorable foreign exchange
rate fluctuations of 4 percent. Worldwide sales of pharmaceutical
products in 1996 increased 13 percent over 1995, reflecting
volume growth of 15 percent, price decreases of 1 percent and
unfavorable foreign exchange rate fluctuations of 1 percent.
Domestic prescription pharmaceutical product sales grew 29
percent in 1997. Sales of allergy/respiratory products increased
33 percent, due to continued strong growth of the CLARITIN
brand and increases for VANCERIL asthma and VANCENASE allergy
products. The allergy/respiratory sales gain reflects a 10
percent decline in sales of the PROVENTIL (albuterol) line of
asthma products, due to increased generic competition.
Domestic sales of anti-infective and anticancer products rose 20
percent compared with 1996, 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 CEDAX, a broad-spectrum oral
cephalosporin antibiotic launched in the 1996 first quarter.
These sales increases were moderated by lower sales of EULEXIN, a
prostate cancer therapy, due to branded competition. Sales of
cardiovascular products advanced 22 percent, reflecting market
share increases for IMDUR, an oral nitrate for angina, and K-DUR,
a potassium supplement. Dermatological product sales increased 6
percent, due to higher sales of LOTRISONE, an antifungal/anti-
inflammatory cream, and ELOCON, a mid-potency topical
corticosteroid.
Domestic prescription pharmaceutical sales in 1996 advanced 23
percent versus 1995, led by gains in allergy/respiratory
products, primarily reflecting strong growth of the CLARITIN
brand. Sales growth was recorded in all product categories.
In 1997, sales of international ethical pharmaceutical products
increased 5 percent. Excluding the impact of foreign exchange
rate fluctuations, sales would have risen approximately 13
percent.
International sales of allergy/respiratory products advanced 20
percent over 1996, led by growth for the CLARITIN brand.
Cardiovascular product sales rose 9 percent and sales of
dermatological products increased 5 percent. International sales
of anti-infective and anticancer products rose 3 percent in 1997,
reflecting higher sales of INTRON A tempered by lower sales of
EULEXIN due to generic and branded competition. LOSEC, an anti-
ulcer treatment licensed from AB Astra, also contributed to
higher overall international sales.
In 1996, international ethical pharmaceutical sales, excluding
foreign exchange, increased 6 percent over 1995, reflecting gains
in all therapy areas.
Worldwide sales of animal health products increased 103 percent
in 1997. Unfavorable foreign exchange rate fluctuations had a
negative effect of 4 percentage points on this sales growth.
Excluding Mallinckrodt sales of approximately $171 million,
animal health sales increased 16 percent. The sales growth was
driven by NUFLOR, a broad-spectrum, multi-species antibiotic.
Sales of animal health products in 1996 increased 4 percent over
1995, excluding foreign exchange.
Sales of health care products in 1997 increased 10 percent
compared with 1996, reflecting volume increases of 9 percent and
price increases of 1 percent. Foot care product sales rose 15
percent, due primarily to new product introductions such as DR.
SCHOLL'S DYNASTEP Inserts and Gel Insoles. Sun care sales were
up 21 percent while over-the-counter (OTC) product sales
decreased 1 percent, primarily due to private-label competition
for allergy/cold products.
In 1996, 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 allergy/cold
products, partially tempered by higher foot care sales.
Income Before Income Taxes
Income before income taxes totaled $1.9 billion in 1997, an
increase of 19 percent over 1996. In 1996, income before income
taxes of $1.6 billion grew 15 percent over $1.4 billion in 1995.
Summary of Costs and Expenses:
(Dollars in millions)
% Increase
1997 1996 1995 1997/96 1996/95
Cost of sales . . . . . . $1,308 $1,078 $1,005 21 % 7 %
% of sales. . . . . . . . 19.3 % 19.1 % 19.7 %
Selling, general and
administrative. . . . . $2,664 $2,209 $1,990 21 % 11 %
% of sales . . . . . . . 39.3 % 39.1 % 39.0 %
Research and development. $ 847 $ 723 $ 657 17 % 10 %
% of sales . . . . . . . 12.5 % 12.8 % 12.9 %
Cost of sales as a percentage of sales in 1997 increased versus
1996 primarily due to the inclusion of Mallinckrodt products
during the second half of the year, partially offset by a
favorable sales mix of other pharmaceutical products. The
decrease of 1996 cost of sales as a percentage of sales versus
1995 reflects a favorable sales mix of pharmaceutical products
coupled with continued cost-containment efforts across worldwide
operations.
Selling, general and administrative expenses in 1997 increased as
a percentage of sales compared with 1996, mainly due to an
expanded field force and increased promotional and selling-
related spending, primarily for the CLARITIN brand and INTRON A.
The 1996 increase as a percentage of sales from 1995 reflects
higher promotional and selling-related spending for the CLARITIN
brand, INTRON A and the domestic launch of CEDAX.
Research and development expenses increased $124 million, or 17
percent, in 1997 and represented 12.5 percent of sales. 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.
Income Taxes
The Company's effective tax rate was 24.5 percent in 1997, 1996
and 1995. 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 1997 increased 19 percent to $1.4 billion. Income in
1996 increased 15 percent over 1995. Differences in year-to-year
exchange rates reduced comparative income growth in 1997 and
1996. After eliminating these exchange differences, income would
have risen approximately 22 percent in 1997 and 18 percent in
1996.
Accounting Pronouncements
In 1997, the Company adopted 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. Also, see "New Accounting
Pronouncements" in the Notes to Consolidated Financial Statements
for information regarding accounting pronouncements that will be
adopted in 1998.
Earnings Per Common Share
Basic earnings per common share from continuing operations rose
19 percent in 1997 to $1.97 and 16 percent in 1996 to $1.65.
Diluted earnings per common share from continuing operations rose
20 percent in 1997 to $1.95 and 16 percent in 1996 to $1.63. In
1996, basic and diluted earnings per common share increased at a
higher rate than income due to the Company's share repurchase
programs. The strengthening of the U.S. dollar versus most
foreign currencies decreased comparative growth in earnings per
common share in 1997 and 1996. Excluding the impact of these
exchange rate fluctuations, basic and diluted earnings per common
share from continuing operations would have increased
approximately 23 percent in 1997 and 19 percent in 1996.
Over the past three years, the Board of Directors has authorized
several share repurchase programs. Under these programs,
approximately 34 million common shares were repurchased during
1997, 1996 and 1995. A new $1 billion program was announced in
October 1997 and commenced in January 1998.
Acquisition
In June 1997, the Company acquired the worldwide animal health
operations of Mallinckrodt Inc. for approximately $354 million in
cash. The addition of Mallinckrodt has created a world-class
animal health business, with broader product lines and expanded
geographic distribution capabilities. For additional
information, see "Acquisition" in the Notes to Consolidated
Financial Statements.
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. For
additional information, see "Legal and Environmental Matters" 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.
The Company has developed plans and began implementation several
years ago to modify its computer systems to enable the proper
processing of transactions relating to the year 2000. The plan
includes replacing and/or updating existing systems in order to
avoid business interruption. The Company expects this project to
be substantially completed by the end of 1998. The estimated
cost of these modifications, incurred over the life of the
project, is expected to be approximately $50 million.
Liquidity and Financial Resources
Cash generated from operations continues to be the Company's
major source of funds to finance working capital, capital
expenditures, acquisitions, shareholder dividends and common
share repurchases.
Cash provided by continuing operating activities totaled $1,845
million in 1997, $1,459 million in 1996 and $1,383 million in
1995.
Capital expenditures amounted to $373 million in 1997, $325
million in 1996 and $294 million in 1995. It is anticipated that
capital expenditures will approximate $490 million in 1998.
Commitments for future capital expenditures totaled $60 million
at December 31, 1997.
Common shares repurchased in 1997 totaled 2.4 million shares at a
cost of $132 million. In 1996, 11.7 million shares were
repurchased for $388 million and, in 1995, 19.9 million shares
were repurchased at a cost of $494 million.
Dividend payments of $542 million were made in 1997, compared
with $474 million in 1996 and $416 million in 1995. Dividends
per common share were $0.735 in 1997, up from $0.64 in 1996 and
$0.5625 in 1995.
Short-term borrowings and current portion of long-term debt
totaled $581 million at year-end 1997, $855 million in 1996 and
$841 million in 1995. 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 18
percent in 1997 from 30 percent in 1996, resulting from both an
increase in shareholders' equity and a decrease in short-term
borrowings. The Company's liquidity and financial resources
continue to be sufficient to meet its operating needs. As of
December 31, 1997, the Company had $1.1 billion in unused lines
of credit, including $888 million available under the $1 billion
multi-currency unsecured revolving credit facility expiring in
2001. 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,
1997.
Market Risk Disclosures
The Company is exposed to market risk primarily from changes in
foreign currency exchange rates and to a lesser extent interest
rates. The following describes the nature of the risks and
demonstrates that, in general, such market risk is not material
to the Company.
Foreign Currency Exchange Risk
The Company operates in over 40 countries worldwide. In 1997,
sales outside the United States accounted for approximately 40
percent of worldwide sales. Virtually all of these sales were
denominated in currencies of the local country. As such, the
Company's reported profits and cash flows are exposed to changing
exchange rates. In 1997, the general strengthening of the U.S.
dollar vis-a-vis foreign currencies reduced sales by
approximately 3 percent. The effect of foreign exchange reduced
1997 basic earnings per common share by 4 percent and 1997
diluted earnings per common share by 3 percent.
To date, management has not deemed it cost-effective to engage in
a formula-based program of hedging the profits and cash flows of
foreign 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. In addition, the risk of adverse exchange
rate change is mitigated by the fact that the foreign operations
are widespread, with no one foreign country accounting for more
than 5 percent of consolidated sales. The widespread nature of
the Company's foreign operations is the primary reason why the
recent financial crisis in certain Asian countries is not
expected to significantly impact future operations of the
Company.
In addition, at any point in time the Company's foreign
subsidiaries hold financial assets and liabilities that are
denominated in currencies other than U.S. dollars. These
financial assets and liabilities consist primarily of short-term,
third-party and intercompany receivables and payables. Changes
in exchange rates affect these financial assets and liabilities.
For the most part, however, these gains or losses arise from
translation and, as such, do not significantly affect net income.
On occasion, the Company has used derivatives to hedge specific
risk situations involving foreign currency exposures. However,
these derivative transactions have not been material and no such
derivatives were held at December 31, 1997.
Interest Rate and Equity Price Risk
The financial assets of the Company that are exposed to changes
in interest rates and equity prices are primarily limited to debt
and equity securities held in non-qualified trusts for employee
benefits. These trust investments totaled approximately $150
million at December 31, 1997. Due to the long-term nature of the
liabilities that these assets fund, the Company's exposure to
market risk is low. A decline in market value of these
investments would not necessitate any near-term funding of the
trusts. The other financial assets of the Company do not give
rise to significant interest rate risk due to their short
duration.
The financial liabilities of the Company that are exposed to
changes in interest rates are limited primarily to short-term
borrowings (long-term borrowings are not significant). Although
all the short-term borrowings are floating rate debt, the
interest rate risk posed by these borrowings is low because the
amount of debt has historically been small in relation to annual
cash flow. The Company has the ability to pay off this debt
relatively quickly if interest rates were to increase
significantly. The other financial liabilities of the Company do
not give rise to significant interest rate risk due to their
short duration. For the reasons discussed above, the Company has
not engaged in managing interest rate risk using derivative
financial instruments.
International Cash Management
In the early 1990s, the Company utilized a series of interest
rate swaps as part of its international cash management strategy.
For additional information, see "Financial Instruments" in the
Notes to Consolidated Financial Statements. These swaps subject
the Company to a moderate degree of market risk. The Company
accounts for these swaps using fair value accounting with changes
in the fair value recorded in earnings. The fair value of these
swaps was a liability of $1 million at December 31, 1997. The
fair value of these swaps at December 31, 1996, was less than $100
thousand. It is estimated that a 10 percent change in interest
rate structure could change the fair value of the swaps by
approximately $5 million.
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 of the
Company's December 31, 1997, Form 10-K filed with the Securities
and Exchange Commission.
Schering-Plough Corporation and Subsidiaries
Statements of Consolidated Income
(Amounts in millions, except per share figures)
For The Years Ended December 31, 1997 1996 1995
Sales . . . . . . . . . . . . . . . . . . . . . $ 6,778 $5,656 $5,104
Costs and expenses:
Cost of sales . . . . . . . . . . . . . . . . 1,308 1,078 1,005
Selling, general and administrative . . . . . 2,664 2,209 1,990
Research and development. . . . . . . . . . . 847 723 657
Other expense, net. . . . . . . . . . . . . . 46 40 57
Total costs and expenses . . . . . . . . . . 4,865 4,050 3,709
Income before income taxes. . . . . . . . . . . 1,913 1,606 1,395
Income taxes. . . . . . . . . . . . . . . . . 469 393 342
Income from continuing operations . . . . . . . 1,444 1,213 1,053
Discontinued operations:
Loss from operations . . . . . . . . . . . . . - - (10)
Loss on disposal . . . . . . . . . . . . . . . - - (156)
___________________________________________________________________________________
Net income. . . . . . . . . . . . . . . . . . . $ 1,444 $1,213 $ 887
Basic earnings per common share:
Continuing operations. . . . . . . . . . . . . $ 1.97 $ 1.65 $ 1.42
Discontinued operations. . . . . . . . . . . . - - (.22)
___________________________________________________________________________________
Basic earnings per common share . . . . . . . . $ 1.97 $ 1.65 $ 1.20
Diluted earnings per common share:
Continuing operations. . . . . . . . . . . . . $ 1.95 $ 1.63 $ 1.40
Discontinued operations. . . . . . . . . . . . $ - - (.22)
___________________________________________________________________________________
Diluted earnings per common share . . . . . . . $ 1.95 $ 1.63 $ 1.18
Statements of Consolidated Retained Earnings
(Amounts in millions, except per share figures)
For The Years Ended December 31, 1997 1996 1995
Retained Earnings, Beginning of Year. . . . . . $5,081 $4,342 $3,978
Net income. . . . . . . . . . . . . . . . . . 1,444 1,213 887
Cash dividends on common shares (per share:
1997, $.735; 1996, $.64; and 1995, $.5625) . (542) (474) (416)
Effect of 2-for-1 stock split . . . . . . . . (310) - (107)
___________________________________________________________________________________
Retained Earnings, End of Year. . . . . . . . . $5,673 $5,081 $4,342
See Notes to Consolidated Financial Statements.
Schering-Plough Corporation and Subsidiaries
Statements of Consolidated Cash Flows
(Amounts in millions)
For The Years Ended December 31, 1997 1996 1995
Operating Activities:
Income from continuing operations. . . . . . . . . . $ 1,444 $1,213 $1,053
Depreciation and amortization. . . . . . . . . . . . 200 173 157
Accounts receivable. . . . . . . . . . . . . . . . . (40) 2 11
Inventories. . . . . . . . . . . . . . . . . . . . . (43) (112) (64)
Prepaid expenses and other assets. . . . . . . . . . (127) (144) (108)
Accounts payable and other liabilities . . . . . . . 411 327 334
Net cash provided by operating activities. . . . . . 1,845 1,459 1,383
Investing Activities:
Purchase of business, net of cash acquired . . . . . (354) - -
Capital expenditures and purchased software. . . . . (405) (336) (304)
Reduction of investments . . . . . . . . . . . . . . 36 1 45
Purchases of investments . . . . . . . . . . . . . . (77) (78) (93)
Other, net . . . . . . . . . . . . . . . . . . . . . (8) 5 8
Net cash used for investing activities (808) (408) (344)
Financing Activities:
Cash dividends paid to common shareholders . . . . . (542) (474) (416)
Common shares repurchased. . . . . . . . . . . . . . (132) (388) (494)
Net change in short-term borrowings. . . . . . . . . (290) 113 (46)
Repayment of long-term debt. . . . . . . . . . . . . (1) (140) (1)
Other, net . . . . . . . . . . . . . . . . . . . . . 116 53 47
Net cash used for financing activities . . . . . . . (849) (836) (910)
Effect of exchange rates on cash and cash equivalents. (9) (1) (3)
Net Cash Flow from Continuing Operations . . . . . . . 179 214 126
Net Cash Flow from Discontinued Operations . . . . . . - - 80
Net Increase in Cash and Cash Equivalents . . . . . . 179 214 206
Cash and Cash Equivalents, Beginning of Year . . . . . 535 321 115
Cash and Cash Equivalents, End of Year . . . . . . . . $ 714 $ 535 $ 321
See Notes to Consolidated Financial Statements.
Schering-Plough Corporation and Subsidiaries
Consolidated Balance Sheets
(Amounts in millions, except per share figures)
At December 31, 1997 1996
ASSETS
__________________________________________________________________________
Current Assets:
Cash and cash equivalents. . . . . . . . . . . $ 714 $ 535
Accounts receivable, less allowances:
1997, $87; 1996, $73 . . . . . . . . . . . . 645 542
Inventories. . . . . . . . . . . . . . . . . . 713 594
Prepaid expenses, deferred income taxes
and other current assets. . . . . . . . . . . 848 694
Total current assets . . . . . . . . . . . . . 2,920 2,365
Property, at cost:
Land . . . . . . . . . . . . . . . . . . . . . 47 41
Buildings and improvements . . . . . . . . . . 1,716 1,563
Equipment. . . . . . . . . . . . . . . . . . . 1,585 1,296
Construction in progress . . . . . . . . . . . 402 462
Total. . . . . . . . . . . . . . . . . . . . . 3,750 3,362
Less accumulated depreciation. . . . . . . . . 1,224 1,116
Property, net. . . . . . . . . . . . . . . . . 2,526 2,246
Intangible Assets, net. . . . . . . . . . . . . . . 481 297
Other Assets. . . . . . . . . . . . . . . . . . . . 580 490
$6,507 $5,398
1997 1996
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Accounts payable . . . . . . . . . . . . . . . $ 803 $ 592
Short-term borrowings and current portion of
long-term debt . . . . . . . . . . . . . . . 581 855
U.S., foreign and state income taxes . . . . . 474 459
Accrued compensation . . . . . . . . . . . . . 274 205
Other accrued liabilities. . . . . . . . . . . 759 489
Total current liabilities. . . . . . . . . . . 2,891 2,600
Long-Term Liabilities:
Long-term debt . . . . . . . . . . . . . . . . 46 46
Deferred income taxes. . . . . . . . . . . . . 278 267
Other long-term liabilities. . . . . . . . . . 471 425
Total long-term liabilities. . . . . . . . . . 795 738
Shareholders' Equity:
Preferred shares - authorized shares - 50;
$1 par value; issued - none . . . . . . . . . - -
Common shares - authorized shares - 1997,
1,200; 1996, 600, $1 par value; issued -
1997, 1,015; 1996, 507. . . . . . . . . . . . 1,015 507
Paid-in capital. . . . . . . . . . . . . . . . 96 172
Retained earnings. . . . . . . . . . . . . . . 5,673 5,081
Foreign currency translation adjustment and
other . . . . . . . . . . . . . . . . . . . . (244) (140)
Total. . . . . . . . . . . . . . . . . . . . . 6,540 5,620
Less treasury shares, at cost - 1997, 282;
1996, 142 . . . . . . . . . . . . . . . . 3,719 3,560
Total shareholders' equity . . . . . . . . . . 2,821 2,060
$ 6,507 $5,398
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, primarily consist of debt and equity securities
held 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 1997, 1996 and 1995, 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 a substantial portion of 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 $166, $149 and $143 in 1997, 1996 and
1995, respectively.
Intangible Assets - Intangible assets principally include
goodwill, patents, trademarks and licenses. Intangible assets
are recorded at cost and amortized on the straight-line method
over periods not exceeding 40 years. Accumulated amortization of
intangible assets was $99 and $77 at December 31, 1997 and 1996,
respectively. 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 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 $6, $11 and
$4 in 1997, 1996 and 1995, respectively. The accumulated foreign
currency translation account balances were $252 and $151 at
December 31, 1997 and 1996, respectively.
Earnings Per Common Share - In February 1997, the Financial
Accounting Standards Board issued SFAS No. 128, "Earnings per
Share." This standard revises certain methodology for computing
earnings per common share (EPS) and requires the reporting of two
earnings per share figures: basic earnings per share and diluted
earnings per share. Basic earnings per common share are computed
by dividing net income by the weighted-average number of common
shares outstanding. Diluted earnings per share are computed by
dividing net income by the sum of the weighted-average number of
common shares outstanding plus the dilutive effect of shares
issuable through deferred stock units and the exercise of stock
options and warrants.
All prior period earnings per share figures presented herein have
been restated in accordance with the adoption of SFAS No. 128.
For the Company, basic earnings per common share equal previously
reported primary earnings per common share and diluted earnings
per common share equal previously reported fully diluted earnings
per common share.
The shares used for basic earnings per common share and diluted earnings per common share
are reconciled as follows:
(shares in millions)
1997 1996 1995
Basic earnings per common share:
Average shares outstanding
for basic earnings per share. . . . 732 735 739
Diluted earnings per common share:
Average shares outstanding
for basic earnings per share. . . . 732 735 739
Dilutive effect of warrants, options
and deferred stock units. . . . . . 8 9 10
Average shares outstanding
for diluted earnings per share. . . . . 740 744 749
Derivatives - The Company has used foreign currency swap
contracts to hedge the Company's foreign net investment and has
used interest rate swap contracts for international cash
management purposes. Hedges of foreign net investments are
deemed effective when the related translation gain or loss equals
or exceeds the after-tax gain or loss on the contracts. In this
case, changes in the contracts' value due to changes in spot
rates are recorded in the foreign currency translation adjustment
account. If all or any portion of the contracts are not
effective as a hedge, the related changes in the fair value are
recorded in income. Interest rate swaps used for cash management
purposes are recorded at fair value. Changes in fair value
during the period are recorded in earnings. Annual net cash flows
for payments and receipts under these interest rate swap
contracts are not material. The net asset or liability under
these interest rate swaps is recorded in other current assets or
other accrued liabilities, as applicable.
Acquisition
On June 30, 1997, the Company acquired the worldwide animal
health business of Mallinckrodt Inc. for approximately $490,
which includes the assumption of debt and direct costs of the
acquisition. The acquisition was recorded under the purchase
method of accounting. The December 3l, 1997, balance sheet
reflects a preliminary allocation of the purchase price pending
the completion of fair value studies of individual assets
acquired. The excess of the purchase price over the fair value
of identifiable net assets acquired is included in intangible
assets, net. The results of operations of the purchased animal
health business have been included in the Company's statement of
consolidated income from the date of acquisition. Pro forma
results of the Company, assuming the acquisition had been made at
the beginning of each period presented, would not be materially
different from the results reported.
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, 1997 December 31, 1996
Carrying Estimated Carrying Estimated
Value Fair Value Value Fair Value
ASSETS:
Cash and cash equivalents $714 $714 $535 $535
Debt and equity investments 180 180 148 148
LIABILITIES:
Short-term borrowings 581 581 855 855
Long-term debt 46 46 46 46
Derivative Financial
Instruments:
Interest rate swap contracts 1 1 - -
Foreign currency swap contracts - - 48 65
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 on derivative
instruments by dealing only with financially sound
counterparties. Accordingly, the Company does not anticipate
loss for non-performance. The Company does not enter into
derivative instruments to generate trading profits. Refer to
"Market Risk Disclosures" in Management's Discussion and
Analysis of Operations and Financial Condition for a discussion
regarding the market risk of the Company's financial instruments.
Net Investment in Foreign Subsidiaries
The Company has used interest-bearing, long-term foreign currency
swaps to hedge its net investment in Japan. At December 31,
1996, the Company had three such swaps. All three swaps were
settled in 1997. As part of the settlement, the Company paid
14.9 billion yen and received $80. As of December 31, 1996, the
Company's obligations under these contracts were included in
other accrued liabilities and other long-term liabilities.
International Cash Management
In 1991 and 1992, the Company utilized interest rate swaps as
part of its international cash management strategy. The notional
principal of the 1991 arrangement is $650 and the notional
principal of the 1992 arrangement is $950. Both the $650 and $950
arrangements have 20-year terms. At December 31, 1997, 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.
Commitments
Total rent expense amounted to $44 in 1997, $37 in 1996 and $31 in
1995. Future minimum rental commitments on non-cancelable
operating leases as of December 31, 1997, range from $24 in 1998
to $5 in 2002, with aggregate minimum lease obligations of $18 due
thereafter. The Company has commitments related to future capital
expenditures totaling $60 as of December 31, 1997.
Borrowings
The Company has a $1 billion committed, 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. At December 31, 1997, $112 has been drawn down under
this facility. In addition, the Company's foreign subsidiaries
had available $239 in unused lines of credit from various
financial institutions at December 31, 1997. Generally, these
foreign credit lines do not require commitment fees or
compensating balances and are cancelable at the option of the
Company or the financial institutions.
Short-term borrowings consist of commercial paper issued in the
United States, bank loans, notes payable and amounts drawn down
under the revolving credit facility. Commercial paper
outstanding at December 31, 1997 and 1996 was $389 and $784,
respectively. The weighted-average interest rate for short-term
borrowings at December 31, 1997 and 1996 was 5.6 percent and 5.8
percent, respectively.
Long-term debt, including current maturities, at December 31 consisted of the following:
1997 1996
Industrial revenue bonds, callable annually,
due 2013: 3.8%. . . . . . . . . . . . . . . . . . . $ 40 $ 40
Other . . . . . . . . . . . . . . . . . . . . . . . . 27 11
67 51
Current maturities. . . . . . . . . . . . . . . . . . (21) (5)
Total long-term debt. . . . . . . . . . . . . . . . . $ 46 $ 46
The Company has a shelf registration statement on file with the
Securities and Exchange Commission covering the issuance of up to
$200 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, 1997, no debt securities have been issued pursuant
to this registration.
Interest Costs and Income
Interest costs were as follows:
1997 1996 1995
Interest cost incurred . . . . . . . . . . . . $55 $56 $68
Less: amount capitalized on
construction. . . . . . . . . . . . . . 15 11 11
Interest expense . . . . . . . . . . . . . . . $40 $45 $57
Cash paid for interest, net of
amount capitalized . . . . . . . . . . . . . $37 $52 $56
Interest income for 1997, 1996 and 1995 was $56, $33 and $23,
respectively. Interest income and interest expense are included
in other expense, net.
Shareholders' Equity
On April 22, 1997, the Board of Directors voted to increase the
number of authorized common shares from 600 million to 1.2 billion
and approved a 2-for-1 stock split. Distribution of the split
shares was made on June 3, 1997. All per share amounts herein
have been adjusted to reflect the split.
In June 1997, the Board of Directors of the Company approved the
redemption of the Company's outstanding Preferred Share Purchase
Rights at the redemption price of $.00125 per right, effective
July 10, 1997. The Board also declared a dividend distribution
of one new Preferred Share Purchase Right on each outstanding
share of Schering-Plough common stock to replace the rights being
redeemed. The 1997 rights are attached to, and presently only
trade with, the Company's common shares and are not exercisable.
The 1997 rights will become exercisable only if a person or group
acquires 20 percent or more of the Company's common stock or
announces a tender offer which, if completed, would result in
ownership by a person or group of 20 percent or more of the
Company's common stock. Should a person acquire 20 percent or more
of the Company's outstanding common stock through a merger or
other business combination transaction, each right will entitle
its holder (other than such acquirer) to purchase common shares of
Schering-Plough having a market value of twice the exercise price
of the right. The exercise price of the rights is $200.
Following the acquisition by a person or group of beneficial
ownership of 20 percent or more but less than 50 percent of the
Company's common stock, the Board of Directors may call for the
exchange of the rights (other than rights owned by such acquirer),
in whole or in part, for the common stock at an exchange ratio of
one for one, or one one-hundredth of a share of Junior
Participating Preferred Stock per right. Also, prior to the
acquisition by a person or group of beneficial ownership of 20
percent or more of the Company's common stock, the rights are
redeemable for 1 cent per right at the option of the Board of
Directors. The new rights will expire in July 2007 unless earlier
redeemed. The Board of Directors is also authorized to reduce the
20 percent thresholds referred to above to not less than 10
percent.
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, 1995 . . . . . . $252 $133 66 $2,672
Effect of 1995 2-for-1 stock split . 251 (145) 65 -
Stock incentive plans. . . . . . . . - 62 (2) 2
Purchase of treasury shares. . . . . - - 10 494
Balance at December 31, 1995. . . . . 503 50 139 3,168
Stock incentive plans. . . . . . . . - 92 (3) 4
Settlement of warrants . . . . . . . 3 (23) - -
Purchase of treasury shares. . . . . - - 6 388
Shares issued for acquisition. . . . 1 53 - -
Balance at December 31, 1996. . . . . 507 172 142 3,560
Effect of 1997 2-for-1 stock split . 508 (198) 142 -
Stock incentive plans. . . . . . . . - 122 (4) 27
Purchase of treasury shares. . . . . - - 2 132
Balance at December 31, 1997. . . . . $1,015 $ 96 282 $3,719
Stock Incentive Plans
Under the terms of the Company's 1997 Stock Incentive Plan, 36
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 2002. 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 grant. Standard options granted generally have a
one-year vesting term. Other options granted vest 20 percent per
year for five years starting five years 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 five equal annual installments generally
commencing one year from the date of the award.
The following table summarizes stock option activity over the past three years under the
current and prior plans (number of options in millions):
1997 1996 1995
Weighted- Weighted- Weighted-
Number Average Number Average Number Average
of Exercise of Exercise of Exercise
Options Price Options Price Options Price
Outstanding at
January 1. . . . 20 $19.14 20 $14.22 19 $11.92
Granted . . . . 5 41.14 6 28.72 4 22.95
Exercised . . . (4) 15.53 (5) 11.42 (3) 12.54
Canceled
or expired . . - - (1) 20.78 - -
Outstanding at
December 31. . . 21 $24.41 20 $19.14 20 $14.22
Options exercisable
at December 31. . 13 $18.57 11 $13.92 13 $12.32
The Company accounts for its stock compensation arrangements
using the intrinsic value method. If the fair value method of
accounting was applied as defined in SFAS No. 123, "Accounting
for Stock-Based Compensation," the Company's pro forma net income
would have been $1,421, $1,197 and $883 for 1997, 1996 and 1995,
respectively. Pro forma basic earnings per share would have been
$1.94, $1.63 and $1.20 for 1997, 1996 and 1995, respectively, and
pro forma diluted earnings per share would have been $1.92, $1.61
and $1.18 for 1997, 1996 and 1995 respectively.
The weighted-average fair value per option granted in 1997, 1996 and 1995 was $9.20, $6.22
and $5.64, respectively. The fair value was estimated using the Black-Scholes option
pricing model based on the following assumptions:
1997 1996 1995
Dividend yield 2.6% 2.8% 2.8%
Volatility 20% 20% 20%
Risk-free interest rate 6.1% 5.7% 6.6%
Expected term of options (in years) 5 5 5
In 1997, 1996 and 1995, the Company awarded deferred stock units
totaling 1.5 million, 1.8 million and 1.6 million, respectively.
The expense recorded in 1997, 1996 and 1995 for deferred stock
units was $32, $27 and $23, respectively.
Inventories
Year-end inventories consisted of the following:
1997 1996
Finished products . . . . . . . . . . . . . . $334 $297
Goods in process. . . . . . . . . . . . . . . 191 173
Raw materials and supplies. . . . . . . . . . 188 124
Total inventories . . . . . . . . . . . . . . $713 $594
Inventories valued on a last-in, first-out basis comprised
approximately 34 percent and 45 percent of total inventories at
December 31, 1997 and 1996, respectively. The estimated
replacement cost of total inventories at December 31, 1997 and
1996 was $745 and $645, 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:
1997 1996 1995
Service cost - benefits earned during
the year. . . . . . . . . . . . . . . $ 37 $ 37 $ 29
Interest cost on projected benefit
obligation. . . . . . . . . . . . . . 54 50 47
Actual return on plan assets . . . . . (130) (99) (153)
Net amortization and deferral . . . . . 44 18 79
Net pension expense . . . . . . . . . . $ 5 $ 6 $ 2
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
1997 1996 1997 1996
Projected benefit obligation:
Accumulated benefit obligation,
including vested benefits of
$667 in 1997 and $605 in 1996. . . . . $570 $520 $132 $117
Effect of future salary increases. . . 103 88 31 30
Total projected benefit obligation. . . . 673 608 163 147
Plan assets at fair value,
primarily stocks and bonds. . . . . . . 957 877 45 36
Plan assets over (under) projected
benefit obligation. . . . . . . . . . . 284 269 (118) (111)
Unrecognized net transition (asset)
liability . . . . . . . . . . . . . . . (57) (67) 3 4
Unrecognized prior service cost . . . . . 5 6 5 5
Unrecognized net (gain) loss. . . . . . . (76) (70) 39 35
Net pension asset (liability) . . . . . . $156 $138 $(71) $(67)
In addition to the plan assets indicated above, at December 31,
1997 and 1996, securities of $79 and $71, respectively, were held
in non-qualified trusts designated to provide pension benefits
for certain plans presented as under-funded.
The discount rate used in determining the projected benefit
obligation for the Company's U.S. plans was 7.0 percent at
December 31, 1997, and 7.5 percent at December 31, 1996. The
weighted-average discount rate for the Company's non-U.S. plans
was 6.4 percent at December 31, 1997, and 6.7 percent at December
31, 1996. The weighted-average rate of increase in future
compensation levels for all plans was 4.1 percent at December 31,
1997, and 4.2 percent at December 31, 1996. The weighted-average
expected long-term rate of return on plan assets was
approximately 10 percent for both years. The 1997 discount rate
change increased the total projected benefit obligation by
approximately $42. The remaining change reflects 1997 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 $58, $60 and $58 in 1997, 1996 and 1995,
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. Post-retirement benefit expense in 1997,
1996 and 1995 was immaterial.
The accumulated post-retirement benefit obligation and funded status at December 31 were as
follows:
1997 1996
Accumulated post-retirement benefit
obligation attributable to:
Retirees. . . . . . . . . . . . . . . . . . . . . . $ 82 $85
Fully eligible active plan participants . . . . . . 28 24
Other active plan participants. . . . . . . . . . . 52 47
Accumulated post-retirement benefit obligation. . . . . 162 156
Plan assets at fair value, primarily stocks and bonds . 210 192
Plan assets in excess of accumulated post-retirement
benefit obligation. . . . . . . . . . . . . . . . . . 48 36
Unrecognized net gain . . . . . . . . . . . . . . . . . (55) (44)
Accrued post-retirement benefit liability . . . . . . . $ (7) $(8)
The assumed health care cost trend rates used for measurement
purposes were 8.2 percent for 1998, trending down to 5.0 percent
by 2003. The weighted-average discount rate used was 7.0 percent
at December 31, 1997, and 7.5 percent at December 31, 1996. The
weighted-average expected long-term rate of return on plan assets
was 9 percent at December 31, 1997 and 1996.
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 discount rate change increased the accumulated benefit
obligation by approximately $9. At December 31, 1997, a 1 percent
increase in the assumed health care cost trend rate would increase
the combined service and interest cost by approximately $2 and the
accumulated post-retirement benefit obligation by approximately
$20.
Income Taxes
U.S. and foreign operations contributed to income before income taxes as follows:
1997 1996 1995
United States. . . . . . . . . . . . . $1,349 $1,090 $ 917
Foreign. . . . . . . . . . . . . . . . 564 516 478
Total income before income taxes . . . $1,913 $1,606 $1,395
The components of income tax expense were as follows:
1997 1996 1995
Current:
Federal. . . . . . . . . . . . . . . $306 $296 $262
Foreign. . . . . . . . . . . . . . . 160 122 94
State. . . . . . . . . . . . . . . . 10 14 29
Total current. . . . . . . . . . . . 476 432 385
Deferred:
Federal and state. . . . . . . . . . 30 (25) (23)
Foreign. . . . . . . . . . . . . . . (37) (14) (20)
Total deferred . . . . . . . . . . . (7) (39) (43)
Total income tax expense . . . . . . . $469 $393 $342
The difference between the U.S. statutory tax rate and the Company's effective tax rate was
due to the following:
1997 1996 1995
U.S. statutory tax rate. . . . . . . . . 35.0% 35.0% 35.0%
Increase (decrease) in taxes resulting
from:
Lower rates in other jurisdictions,
net . . . . . . . . . . . . . . . . . (10.0) (10.3) (10.7)
Research tax credit. . . . . . . . . . (.6) (.4) (.3)
All other, net . . . . . . . . . . . . .1 .2 .5
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, 1997 and 1996, the Company had total deferred
tax assets of $632 and $485, respectively, and deferred tax
liabilities of $475 and $407, respectively. Valuation allowances
are not significant. Significant deferred tax assets at December
31, 1997 and 1996 were for operating costs not currently
deductible for tax purposes and totaled $390 and $374,
respectively. Significant deferred tax liabilities at December 31,
1997 and 1996 were for depreciation differences, $234 and $219,
respectively, and retirement plans, $54 and $47, respectively.
Other current assets include deferred income taxes of $438 and
$345 at December 31, 1997 and 1996, respectively.
Deferred taxes are not provided on undistributed earnings of
foreign subsidiaries (considered to be permanent investments),
which at December 31, 1997, approximated $2,850. Determining the
tax liability that would arise if these earnings were remitted is
not practicable.
As of December 31, 1997, 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 1997, 1996 and 1995 were $368,
$306 and $319, 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 and the amount can reasonably be estimated.
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,
1997 and 1996, and the related expenses incurred during the three
years ended December 31, 1997, 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 (starting in 1993) 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 and alleges a price-fixing conspiracy. The Company has
agreed to settle the federal class action for a total of $22
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 United States District Court
in Illinois approved the settlement of the federal class action
on June 21, 1996. In June 1997, the Seventh Circuit Court of
Appeals dismissed all appeals from that settlement, and it is not
subject to further review. In addition, in August 1997, the
Seventh Circuit ruled that there was sufficient evidence of
participation in the alleged conspiracy by certain wholesalers to
require them to proceed to trial.
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 consumers of prescription medicine. In addition, an
action has been brought in Alabama purportedly on behalf of
consumers in Alabama and several other states. Plaintiffs are
seeking to maintain the action as a class action. The Company
has settled the retailer class action in Wisconsin and the
alleged class action in Minnesota, subject to Court approval; the
settlement amounts were not significant. Plaintiffs generally
seek treble damages in an unspecified amount and an injunction
against the allegedly unlawful conduct. The Company believes
that all of the antitrust actions are without merit and is
defending itself vigorously.
In April 1997, certain of the plaintiffs in the federal class
action commenced another purported class action in United States
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 District Court has denied the plaintiffs' motion for
a preliminary injunction hearing. The Company believes the
action is without merit and is defending itself vigorously.
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 investigation is ongoing.
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. The case is against another pharmaceutical wholesaler and
11 pharmaceutical companies, and alleges that the defendants
conspired to drive the plaintiff's wholesaler subsidiary 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.
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, net of a tax benefit of $75. Proceeds from the sale were
$48. Contact lens sales during 1995 through the date of
disposition were $46. Loss from discontinued operations for the
year ended December 31, 1995, is net of tax benefits of $7.
New Accounting Pronouncements
In June 1997, the Financial Accounting Standards Board issued
SFAS No. 130, "Reporting Comprehensive Income", and SFAS No. 131,
"Disclosures about Segments of an Enterprise and Related
Information." Both standards for the Company are effective
beginning in 1998. SFAS No. 130 will require the Company to add
the reporting of Comprehensive Income to its financial
statements. The Company is currently evaluating the impact of
SFAS No. 131 on its segment disclosures.
Quarterly Data(Unaudited)
Three Months Ended
March 31, June 30, September 30, December 31,
1997 1996 1997 1996 1997 1996 1997 1996
Sales. . . . . . $1,568 $1,383 $1,720 $1,476 $1,709 $1,383 $1,781 $1,414
Cost of sales. . 289 263 330 287 326 257 363 271
Gross profit . . 1,279 1,120 1,390 1,189 1,383 1,126 1,418 1,143
Selling, general
and
administrative . 594 503 679 579 681 563 710 564
Research and
development . . 179 163 209 178 220 182 239 200
Other, net . . . 9 21 8 12 15 (5) 14 12
Income before
income taxes. . 497 433 494 420 467 386 455 367
Income taxes . . 122 106 121 103 114 95 112 89
Net income . . . $375 $ 327 $ 373 $ 317 $ 353 $ 291 $ 343 $ 278
Basic earnings per
common share. . $.51 $ .45 $ .51 $ .43 $ .48 $ .39 $ .47 $ .38
Diluted earnings
per common share .51 .44 .50 .43 .48 .39 .46 .37
Dividends per
common share. . .165 .145 .19 .165 .19 .165 .19 .165
Common share prices:
High. . . . . . 40 13/16 30 11/16 49 3/8 31 3/8 54 9/16 31 9/16 63 7/16 36 1/8
Low . . . . . . 32 9/16 25 3/4 35 1/4 26 3/4 47 27 1/2 51 11/16 31
Average shares
outstanding for
basic EPS
(in millions). 731 731 732 738 732 739 732 735
Average shares
outstanding for
diluted EPS
(in millions). 738 743 740 746 741 746 741 741
Certain 1996 amounts have been restated to reflect the 1997 2-for-1 stock split.
The Company's common shares are listed and principally traded on the New
York Stock Exchange. The approximate number of holders of record of common
shares as of December 31, 1997 was 42,600.
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 foot care, sun care and over-the-counter products
sold primarily in the United States.
Sales and Operating Profit by Industry Segment
Sales Operating Profit
1997 1996 1995 1997 1996 1995
Pharmaceutical products. . . $6,110 $5,049 $4,471 $1,885 $1,592 $1,381
Health care products . . . . 668 607 633 151 138 153
Total sales and operating
profit. . . . . . . . . . . 6,778 5,656 5,104 2,036 1,730 1,534
General corporate
revenue and expense . . . . (83) (79) (82)
Interest expense . . . . . . (40) (45) (57)
Consolidated sales
and pre-tax profit. . . . . $6,778 $5,656 $5,104 $1,913 $1,606 $1,395
Identifiable Assets, Capital Expenditures, Depreciation and Amortization by
Industry Segment
Capital Depreciation and
Assets Expenditures Amortization
1997 1996 1995 1997 1996 1995 1997 1996 1995
Pharmaceutical
products. . . $5,114 $4,099 $3,609 $ 366 $ 308 $ 276 $ 180 $ 152 $ 135
Health care
products. . . 398 375 373 6 14 17 15 16 17
Industry
segment
totals. . . . 5,512 4,474 3,982 372 322 293 $ 195 168 152
Corporate. . . 995 924 683 1 3 1 5 5 5
Consolidated
assets,
capital
expenditures,
depreciation and
amortization. $6,507 $5,398 $4,665 $ 373 $ 325 $ 294 $ 200 $ 173 $ 157
Sales, Operating Profit and Identifiable Assets by Geographic Area
Sales Operating Profit Assets
1997 1996 1995 1997 1996 1995 1997 1996 1995
United States. $4,151 $3,283 $2,805 $1,484 $1,203 $1,037 $3,017 $2,472 $2,235
Europe, Middle
East & Africa 1,520 1,376 1,277 334 288 264 1,286 1,159 1,059
Latin America. 453 385 374 85 107 104 371 304 278
Canada, Pacific
Area & Asia . 654 612 648 133 132 129 838 539 410
Total sales,
operating profit
& identifiable
assets. . . . $6,778 $5,656 $5,104 $2,036 $1,730 $1,534 $5,512 $4,474 $3,982
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. Sales, operating profit
and identifiable assets as presented are associated with each geographic
area, based on the location of the ultimate customers.
Report by Management
Management is responsible for the preparation and the integrity
of the accompanying financial statements. These statements are
prepared in accordance with generally accepted accounting
principles and require the use of estimates and assumptions that
affect the reported amounts of assets, liabilities, sales and
expenses. In management's opinion, the consolidated financial
statements present fairly the Company's results of operations,
financial position and cash flows. All financial information in
this Annual Report is consistent with the financial statements.
The Company maintains, and management relies on, a system of
internal accounting controls and related policies and procedures
that provides reasonable assurance of the integrity and
reliability of the financial statements. The system provides, at
appropriate cost and within the inherent limitations of all
internal control systems, that transactions are executed in
accordance with management's authorization, are properly recorded
and reported in the financial statements, and that assets are
safeguarded. The Company's internal accounting control system
provides for careful selection and training of supervisory and
management personnel and requires appropriate segregation of
responsibilities and delegation of authority. 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
the annual consolidated financial statements. They evaluate the
Company's internal accounting controls and perform tests of
procedures and accounting records to enable them to express their
opinion on the fairness of these statements. In addition, the
Company has an internal audit function that 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' and independent auditors' recommendations concerning
the Company's system of internal accounting controls have been
considered and the appropriate action has been taken with respect
to those recommendations.
The Finance, Compliance 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 full and free access to the Committee.
/S/Richard Jay Kogan /S/Jack L. Wyszomierski /S/Thomas H. Kelly
Richard Jay Kogan Jack L. Wyszomierski Thomas H. Kelly
President and Executive Vice President Vice President
Chief Executive and Chief Financial and Controller
Officer 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,
1997 and 1996 and the related statements of consolidated income,
retained earnings and cash flows for each of the three years in
the period ended December 31, 1997. These financial statements
are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial state-
ments based on our audits.
We conducted our audits in accordance with generally accepted
auditing standards. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether
the financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating
the overall financial statement presentation. We believe that
our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present
fairly, in all material respects, the financial position of
Schering-Plough Corporation and subsidiaries at December 31, 1997
and 1996 and the results of their operations and their cash flows
for each of the three years in the period ended December 31,
1997, in conformity with generally accepted accounting
principles.
/S/DELOITTE & TOUCHE LLP
Parsippany, New Jersey
February 12, 1998
Schering-Plough Corporation and Subsidiaries
Six-Year Selected Financial & Statistical Data(Dollars in millions, except per share
figures)
1997 1996 1995 1994 1993 1992
Operating Results
Sales . . . . . . . . . . . . . . $6,778 $5,656 $5,104 $4,537 $4,229 $3,945
Income before income taxes. . . . 1,913 1,606 1,395 1,227 1,073 963
Income from continuing operations
before extraordinary item and
cumulative effect of
accounting changes . . . . . . . 1,444 1,213 1,053 926 816 722
Discontinued operations. . . . - - (166) (4) 9 (2)
Extraordinary item. . . . . . . - - - - - (27)
Cumulative effect of accounting
changes. . . . . . . . . . . . . - - - - (94) 27
Net income. . . . . . . . . . . . 1,444 1,213 887 922 731 720
Basic EPS from continuing
operations before extraordinary
item and cumulative effect of
accounting changes . . . . . . . 1.97 1.65 1.42 1.21 1.05 .90
Discontinued operations . . . . . - - (.22) - .01 -
Extraordinary item. . . . . . . . - - - - - (.03)
Cumulative effect of accounting
changes. . . . . . . . . . . . . - - - - (.12) .03
Basic earnings per common share . 1.97 1.65 1.20 1.21 .94 .90
Diluted EPS from continuing
operations before extraordinary
item and cumulative effect of
accounting changes . . . . . . . 1.95 1.63 1.40 1.20 1.03 .89
Diluted earnings per common share 1.95 1.63 1.18 1.19 .93 .89
Investments
Research and development . . . . $ 847 $ 723 $ 657 $ 610 $ 567 $ 511
Capital expenditures . . . . . . 373 325 294 268 340 373
Financial Condition
Property, net . . . . . . . . . . $2,526 $2,246 $2,099 $2,082 $1,968 $1,749
Total assets. . . . . . . . . . . 6,507 5,398 4,665 4,326 4,317 4,157
Long-term debt. . . . . . . . . . 46 46 87 186 182 184
Shareholders' equity. . . . . . . 2,821 2,060 1,623 1,574 1,582 1,597
Net book value per common share . 3.85 2.82 2.23 2.12 2.04 2.00
Financial Statistics
Income from continuing operations
before extraordinary item and
cumulative effect of accounting
changes as a percent of sales. . 21.3% 21.4% 20.6% 20.4% 19.3% 18.3%
Net income as a percent of sales 21.3% 21.4% 17.4% 20.3% 17.3% 18.3%
Return on average shareholders'
equity . . . . . . . . . . . . 59.2% 65.9% 55.5% 58.4% 46.0% 49.0%
Effective tax rate . . . . . . 24.5% 24.5% 24.5% 24.5% 24.0% 25.0%
Other Data. . . . . . . . . . . .
Cash dividends per common share . $ .735 $.64 $ .5625 $ .495 $ .435 $ .375
Cash dividends on common shares . 542 474 416 379 340 300
Depreciation and amortization . . 200 173 157 145 131 125
Number of employees . . . . . . . 22,700 20,600 20,100 20,000 20,300 19,800
Average shares outstanding
for basic EPS(in millions) . . . 732 735 739 765 780 801
Average shares outstanding
for diluted EPS(in millions) . . 740 744 749 773 790 810
Common shares outstanding
at year-end (in millions) . . . . 733 731 728 744 774 798
Certain amounts for years prior to 1997 have been restated for the effect of the 1997 2-
for-1 stock split. All prior period earnings per share (EPS) figures have been restated
in accordance with SFAS No. 128.
APPENDIX TO EXHIBIT #13
The page preceding the Management's Discussion and Analysis of
Operations and Financial Condition in the 1997 annual report to
shareholders presents three bar graphs. The following three
sections provide the information portrayed in the graphs:
_______________________________________________________________
Title: Sales
The horizontal axis is in years starting with 1993, ending with
1997. The vertical bars indicate the sales amounts for each year
as follows (dollars in millions):
1993 $4,229
1994 $4,537
1995 $5,104
1996 $5,656
1997 $6,778
- ---------------------------------------------------------------
Title: Research and Development
The horizontal axis is in years starting with 1993, ending with
1997. The vertical bars indicate the research and development
amounts for each year as follows (dollars in millions):
1993 $567
1994 $610
1995 $657
1996 $723
1997 $847
- ---------------------------------------------------------------
Title: Capital Expenditures
The horizontal axis is in years starting with 1993, ending with
1997. The vertical bars indicate the capital expenditure amounts
for each year as follows (dollars in millions):
1993 $340
1994 $268
1995 $294
1996 $325
1997 $373