1
EXHIBIT 13
THE UPJOHN COMPANY AND SUBSIDIARIES
Financial Section of the 1994 Annual Report to Shareholders
This exhibit contains the following:
Financial Review (Management's Discussion and Analysis of Financial
Condition and Results of Operations)
Selected Financial Information
Report of Management
Report of Independent Accountants
Consolidated Statements of Earnings - Years Ended December 31, 1994
and 1993
Consolidated Balance Sheets - December 31, 1994 and 1993
Consolidated Statements of Shareholders' Equity - Years Ended December
31, 1994, 1993 and 1992
Consolidated Statements of Cash Flows - Years Ended December 31, 1994,
1993 and 1992
Consolidated Statements of Segment Operations - Years Ended December 31,
1994, 1993 and 1992
Notes to the Consolidated Financial Statements
Summary of Continuing Operations
Quarterly Data
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FINANCIAL REVIEW
Overview of Consolidated Results
Dollars in Millions, except per-share data
1994 % Change 1993 % Change 1992
---------------------------------------------------------------------------------------------------------------
Total revenue $3,344.5 (1%) $3,380.5 3% $3,284.7
Operating income 599.4 30 459.5 (31) 662.7
Earnings from continuing
operations before income
taxes and minority equity 643.3 34 480.0 (29) 671.9
Earnings from continuing
operations 489.1 23 396.4 (25) 527.0
Net earnings 490.8 25 392.4 21 324.3
Net earnings per common share:
-Primary $2.76 27 $2.18 22 $1.78
-Fully diluted $2.68 26 $2.13 22 $1.74
-----------------------------------------------------------------------------------------------------------
When comparing year-to-year earnings, accounting changes and restructurings
recorded in each of the prior two years should be considered. In 1993, the
company made two accounting changes: the adoption of calendar-year reporting
for subsidiaries formerly reporting on a fiscal year and the adoption of
Statement of Financial Accounting Standards (SFAS) No. 112 relating to
postemployment benefits. The cumulative effect of these changes reduced 1993
net earnings by $18.9 million ($.11 per share). In 1992, the company adopted
SFAS No. 106 relating to postretirement benefit costs other than pensions and
SFAS No. 109 relating to accounting for income taxes. The cumulative effect of
these accounting changes reduced net earnings by $223 million ($1.26 per share)
(see Note D).
In 1993, the company recorded restructuring charges, that reduced operating
income by $209 million ($155 million, or $.89 per share after tax), primarily
associated with a worldwide work-force reduction, the write-down of certain
assets and the reduction of excess manufacturing capacity. In 1992,
restructuring charges of $22 million ($13.4 million, or $.08 per share after
tax) were made to reflect the cost of a special voluntary early retirement
program (see Note C).
Several actions were taken to increase the company's focus on its core
pharmaceutical business, including the 1994 divestitures of the Asgrow Seed
Company and the company's interest in a chicken-breeding joint venture and the
1993 divestiture of Asgrow Florida Company. Both the sales of the Asgrow Seed
Company and Asgrow Florida Company have been reported as discontinued
operations. Accordingly, certain prior-period financial data have been
restated to reflect only the continuing operations of the company (see Note B).
With the sale of the three agricultural segment operations identified above,
the company has elected to report its business operations as a single industry
segment - Pharmaceutical Products. This industry designation more accurately
reflects the ongoing operations of the company. Prior-year data presented in
this review also reflect the single Pharmaceutical Products industry segment.
PRODUCT SALES
The table below provides a year-to-year comparison of consolidated net sales
by major pharmaceutical product group(1):
Dollars in millions 1994 % Change 1993 % Change 1992
---------------------------------------------------------------------------------------------------------------
Central nervous system $ 455.3 (39%) $ 749.7 (4%) $ 783.3
Steroids, anti-inflammatory
and analgesic 413.4 2 406.5 (4) 422.1
Reproductive and women's
health 511.1 41 362.5 24 292.6
Critical care, transplant
and cancer 412.1 8 383.1 11 344.3
Infectious disease 439.0 11 394.0 14 346.4
3
Animal health 336.2 1 332.6 4 320.7
Other products and
materials 707.9 (1) 711.6 (5) 746.8
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Consolidated net sales $3,275.0 (2) $3,340.0 3 $3,256.2
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(1)Prior-year data have been conformed to current year product group
classifications.
Consolidated domestic sales of pharmaceutical products in 1994 decreased 10
percent to $1,847 million from $2,046 million in 1993, and compared to $2,003
million in 1992. Domestic sales in 1994 were 56 percent of total consolidated
sales, down from 61 and 62 percent in 1993 and 1992, respectively.
International sales in 1994 were $1,428 million, up 10 percent from $1,294
million in 1993 and compared to $1,253 million in 1992. Consolidated sales for
1994 were down as the result of a 3 percent decline in price, offset in part by
a 1 percent benefit from foreign exchange. Volume was unchanged.
The current year decline in worldwide sales of central nervous system agents
was the result of intense generic competition against XANAX, the anti-anxiety
agent, which lost U.S. patent protection in October 1993. The U.S. decline in
sales of XANAX was offset somewhat by sales of the company's generic
anti-anxiety agent alprazolam. In international markets, XANAX continued to
record good growth. Sales of HALCION Tablets (triazolam), the sleep inducing
agents, were also down in the U.S. largely due to the loss of U.S. patent
protection in October 1993. Sales of HALCION in international markets were up
in 1994, reversing the trend of decline encountered over the past few years.
The decline in sales of central nervous system agents is expected to continue
in 1995. The 1993 decrease from 1992 sales levels also resulted from the loss
of U.S. patent protection, offset somewhat by the launch of generic versions
of XANAX and HALCION.
The 1994 growth in the steroid, anti-inflammatory and analgesic product group
was led by MOTRIN IB, the over-the-counter nonsteroidal analgesic agent, which
continued to perform well in a very competitive market. This performance
resulted in part from a 1993 agreement that provided access to new-product
technology and product-line extensions. This and other product sales gains
offset the decline in U.S. sales of ANSAID Tablets (flurbiprofen), which
resulted from generic competition encountered in late 1994. U.S. patent
protection for ANSAID was lost in February 1993.
Sales of reproductive and women's health products recorded strong growth
benefiting from the addition of OGEN, the estrogen replacement therapy acquired
in late 1993. Sales of DEPO-PROVERA, the injectable contraceptive, continued
to record strong increases in both U.S. and international markets. Combined
worldwide sales of PROVERA Products (medroxyprogesterone), the progestational
agents, were up for the year in spite of a moderate decline in the U.S. due to
increasing generic competition. CAVERJECT for erectile dysfunction, was
approved for sale in 12 countries in 1994 and also contributed to sales.
International sales of SOLU-MEDROL, the injectable steroid, and other MEDROL
Products led the growth in the critical care, transplant and cancer product
group. Sales of ATGAM, the immunosuppressant, were up slightly for the year.
In 1994, the company completed a series of agreements with Yakult Honsha Co.
Ltd. for the rights to develop and market the anti-cancer compound irinotecan
for several indications in the U.S., Canada, and Latin America. Clinical
development of this compound is currently in process.
VANTIN, the broad-spectrum oral antibiotic sold primarily in the U.S., led the
growth in the infectious disease product group. Sales of CLEOCIN (DALACIN in
international markets), the family of antibiotic products, demonstrated good
growth in international markets but declined in the U.S. Sales of CLEOCIN T
Products (clindamycin topical) were down for the year due to U.S. generic
competition.
In the animal health product group, PIRSUE, introduced late in 1993 for the
treatment of mastitis, and LUTALYSE, the fertility-control agent, both provided
1994 sales growth. Sales of MGA, the feed additive, were flat. Sales of
NAXCEL (EXCENEL in international markets), the antibiotic, were up in
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international markets and down slightly in the U.S. due to a lower-than-average
cattle population. Sales of lincomycin and companion animal products were down
in 1994.
In the other products and materials category, GLYNASE PresTab, the oral
anti-diabetes agent, continued to record good growth in the U.S. Sales of
MICRONASE Tables (glyburide), the oral anti-diabetes agents, were down
significantly from 1993 levels as a result of the loss of U.S. market
exclusivity in the second quarter of 1994. While the company will continue to
sell its generic glyburide to minimize the effect of third-party generic
competition, it is anticipated that combined sales of MICRONASE and glyburide
will decline in 1995. Sales of ROGAINE, the treatment for hair loss, were up
for the year. The consumer products CORTAID, the anti-itch medication; DOXIDAN
and SURFAK, the treatments for constipation; and DRAMAMINE, the treatment for
motion sickness, all demonstrated good growth, while sales of KAOPECTATE, the
treatment for diarrhea, were down for the year.
OTHER OPERATING REVENUE
Operating income for 1994 benefited from marketing alliance agreements with
Burroughs-Wellcome Co. for the promotion of their product ZOVIRAX, and with
Hoechst-Roussel Pharmaceuticals Inc. (HRPI) to market and detail their product
ALTACE. The agreement with Burroughs-Wellcome expires at the end of 1995. An
agreement has been reached with HRPI to sell the company's rights relating to
ALTACE effective January 1, 1995.
COSTS AND EXPENSES
Consolidated operating expenses, stated as a percent of sales, were as follows:
1994 1993 1992
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Cost of products sold 25.7% 23.5% 23.2%
Research and development 18.5 18.3 17.0
Marketing and administrative 39.5 39.4 39.7
Restructuring 6.3 0.7
Operating income 18.3 13.8 20.4
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The rise in 1994 cost of products sold compared to that of the prior two years
is the result of a change in product mix, which is primarily due to U.S.
generic competition encountered with the major products identified previously.
Compared to the products that lost patent protection, the company's generic
equivalents and other products have lower gross margins. The decline is also
due to a higher percentage of total worldwide pharmaceutical product sales in
international markets where the company's products generally carry lower gross
margins.
Expenditures for research and development in 1994 were up slightly as a percent
of sales from 1993 due primarily to the timing of expenses related to large
clinical programs. Both 1994 and 1993 research and development expenditures
are significantly higher than in 1992 due to the continuing costs associated
with accelerated development of FREEDOX IV Solution (tirilazad mesylate) and
other compounds.
In December 1994, further enrollment in the North American clinical trial of
FREEDOX for severe to moderate head injury was suspended pending further
analysis of an unexplained difference in mortality rates. At the time of
suspension, enrollment in this trial was 98 percent complete. The results were
unexpected because a fully-enrolled study in Europe showed no signs of the
effects encountered in the North American trial. The company will continue to
medically evaluate patients in both the North American and European trials for
six months following treatment. The data from both trials will be analyzed to
assess the therapeutic benefit of FREEDOX in the treatment of severe to
moderate head injury and to determine the reason for the difference in
mortality encountered in the North American trial. Analysis of the results of
other clinical trials of FREEDOX for subarachnoid hemorrhage, spinal cord
injury and stroke has not identified any safety concerns and these trials will
continue.
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Marketing and administrative expense as a percent of sales in 1994 was
comparable to both 1993 and 1992. Savings from the 1993 and 1992
restructurings realized in this expense category were offset by increases in
other costs related to various marketing programs and by other expenses. A
portion of the increased cost in 1994 resulted from new-product marketing
expenses related to LUVOX, the treatment for obsessive-compulsive disorder,
which will be sold in the U.S. LUVOX is a product of Solvay Pharmaceuticals
Inc. Unfavorable foreign exchange comparisons in certain international markets
also added to this expense category in 1994.
The restructuring plan announced in October 1993 was in the process of being
implemented during 1994. At the beginning of 1994, approximately 400 employees
had left the company under the 1993 restructuring, while at the end of 1994
that number had increased to approximately 1,100 (see Note C). Certain
elements of the 1993 plan are still in the process of implementation. All
aspects of the 1992 plan had been implemented by the end of 1993. The gross
combined benefit to 1995 earnings from the 1992 and 1993 restructurings is
expected to be approximately $120 million. The benefit is expected to increase
moderately after 1995 when all aspects of the 1993 restructuring plan are fully
implemented.
Earnings before taxes and minority equity from the company's operations in
Europe of $44 million were up significantly in 1994 from a loss of $39 million
and earnings of $11 million in 1993 and 1992, respectively. This improvement
is the result of increased sales volume, a net favorable effect from exchange
and savings from expense reductions. The 1993 European measure was depressed
largely due to unfavorable exchange and the costs of restructuring. Sales
increased in Japan largely as the result of favorable exchange, which was
partially offset by continuing price erosion in that market. Restructuring did
not have a significant adverse effect on earnings in the Japan and Pacific
geographic area in 1993. In other international markets, increases in sales
volume, which were offset somewhat by exchange, and expense savings led to the
significant increase in earnings before taxes from 1993 levels. The costs of
restructuring reduced earnings in other international markets in 1993 (see Note
U).
NONOPERATING INCOME AND EXPENSE
The favorable interest income to interest expense relationships have increased
in each of the years 1992 through 1994. Nonoperating income in 1994 also
benefited from the favorable resolution of a coverage dispute with an insurance
carrier and the gain on the sale of a joint venture. The 1993 measure includes
a nonoperating gain on the sale of a cough/cold medicine trademark. There were
no such gains in 1992.
INCOME TAXES
The effective tax rate for 1994 was 24 percent, compared to 17.5 percent and
21.7 percent in 1993 and 1992, respectively. When the tax benefits related to
restructuring are excluded, the 1993 rate would have been 22 percent. The
increase in 1994 is the result of a higher proportion of earnings from
international operations, which are taxed at relatively higher rates, and a
lower proportion of total earnings from operations in Puerto Rico. The major
products encountering U.S. generic competition are manufactured in Puerto Rico.
The Omnibus Budget Reconciliation Act of 1993 will have a significant impact on
the company's net earnings beginning in 1995. The Act ultimately reduces tax
benefits from operations in Puerto Rico under Section 936 of the Internal
Revenue Code by 60 percent. The change had little effect on the tax rate for
1994.
SFAS No. 109 was adopted effective January 1, 1992. The cumulative effect of
this accounting change was a favorable adjustment to 1992 net earnings of $13
million, resulting primarily from adjusting deferred tax balances to reflect
current tax rates.
FINANCIAL CONDITION
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1994 1993 1992
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Working capital (millions) $1,011 $678 $582
Current ratio 1.9 1.7 1.5
Debt to total capitalization 26.0% 28.1% 30.3%
Return on average equity - continuing
operations before accounting changes 21.9% 19.3% 26.2%
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The significant increase in working capital and the corresponding improvement
in the current ratio were largely the result of the year-end 1994 receipt of
the proceeds from the sale of the Asgrow Seed Company which were temporarily
invested in cash equivalents. Also contributing to the improvement in these
measures was the increase in short-term investments, which were classified on
the balance sheet as other current assets. The company recently announced a
common stock repurchase program, to be completed in 1995, which will utilize
approximately $300 million. The working capital increase and improvement in
the current ratio realized at the end of 1993 was because the proceeds of
medium-term notes had been used during that year to reduce outstanding
commercial paper.
The 1994 ratio of debt to total capitalization benefited from the increase in
total shareholders' equity when compared to a consistent level of year-to-year
total borrowing. The improvement in 1993, when compared to 1992, resulted from
lower total debt.
The 1994 improvement in return on average equity before accounting changes was
due to the favorable earnings comparison. Net earnings in 1993 and 1992 were
reduced by the after-tax expense associated with restructuring, totaling $154.6
and $13.4 million, respectively. Excluding the cost of the restructurings,
return on average equity would have been 27.5 percent in 1993 and 27.9 percent
in 1992.
Net cash provided by operations was $710 million in 1994 compared to $780
million and $597 million in 1993 and 1992, respectively. Significant
adjustments were made to 1993 cash provided by net earnings to reflect the
non-cash effects of restructuring charges. Spending against the related
restructuring reserves reduced the 1994 measure by $72 million. This spending
was primarily the result of the reduction in personnel and is expected to be
less than $35 million in 1995. Cash provided by 1992 net earnings was adjusted
to reflect the non-cash effects of a restructuring and a significant accounting
change. Nonoperating uses of cash in 1994 included purchase of investments;
the addition of property, plant and equipment; the payment of dividends to
shareholders; and the purchase of treasury stock. The largest source of cash
from nonoperating activities was realized from the sale of the Asgrow Seed
Company.
In 1993, proceeds of a $200 million 5.875% debt issue under a 1993 shelf
registration were utilized to redeem $200 million 8% notes that were called at
par on July 1, 1993. Medium-term borrowing at the end of 1994 was unchanged
from 1993 at $466 million and compared to $138 million in 1992. The company
had $134 million available for future borrowing under the 1993 and 1991 shelf
registrations at the end of 1994 (see Note I).
The company utilizes derivative financial instruments in conjunction with its
foreign currency risk management programs. These programs employ
over-the-counter forward exchange contracts and purchased foreign currency
options to hedge existing net transaction exposures and certain existing
obligations in several subsidiary locations. These exposures arise both from
intercompany and third-party transactions. Foreign currency options are
occasionally utilized to hedge anticipated transactions. Risk of loss in the
hedging of anticipated transactions is minimized through the exclusive use of
purchased foreign currency options.
The hedging activities seek to protect operating results and cash flows from
the potential adverse effects of foreign currency fluctuations. This is done
by offsetting the gains or losses on the underlying exposures with losses and
gains on the instruments utilized to create the hedge. The company does not
utilize derivative financial instruments for trading purposes.
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The company is obligated to make contributions to certain employee benefit
programs and may elect to continue funding one other program. The company's
cash flow requirements under the Employee Stock Ownership Plan will begin to
accelerate in 1996 from current levels (see Notes I and P), and there will be a
minimum contribution required for the U.S. pension plan of approximately $25
million. In each of the years 1992 through 1994, the company has made
contributions to a Voluntary Employee Benefit Association to partially prefund
postretirement benefit obligations. Future contributions are discretionary.
As indicated in Note J, the company has committed to make a series of
investments in a company that intends to manufacture a hemoglobin-based oxygen
carrier as certain progress goals are met.
The company's future cash provided by operations and borrowing capacity are
expected to cover normal cash flow needs and planned capital additions for the
foreseeable future, despite the adverse effects of the expiration of patents
and other product protection discussed below.
PATENT EXPIRATIONS
A U.S. Food and Drug Administration (FDA) moratorium on the approval of
Abbreviated New Drug Applications (ANDAs) for products containing glyburide,
the generic name for MICRONASE, expired in May 1994. Patent protection of
ANSAID, CLEOCIN T, XANAX, and HALCION expired in 1993. No significant patent
protection remains on PROVERA. The company began marketing generic equivalents
for most of these products in 1993 and 1994. U.S. sales of these six products,
including that of the generic equivalents, declined from $1,068 million in 1993
to $672 million in 1994. While it is anticipated that sales of these products
will continue to decrease over the next several years, the decline is expected
to be lower than that experienced in 1994.
FDA moratoriums on the approval of ANDAs protect exclusivity for GLYNASE until
March 1995 and for DEPO-PROVERA until November 1995. U.S. patent protection
for ROGAINE will expire in February 1996.
Sales growth of other existing products, the acquisition and development of new
products, the marketing of generic equivalents, and efforts to control costs
and enhance revenues are expected to offset much of the effects of the loss of
patent and ANDA protection. Therefore, the combined earnings impact of the
patent expirations, offset by these strategies and actions, are not expected to
be as severe in 1995 as in 1994. Earnings in years subsequent to 1995 depend
on the success of new products and the strategies noted above.
OTHER ITEMS
The company is subject to environmental legislation and regulation.
Environmental compliance costs, including capital expenditures related to
future production, have been increasing each year. Spending at the Kalamazoo,
Mich., production site is expected in the near future related to groundwater
remediation and improved control of surface water discharges. Other projects
related to the prevention, mitigation and elimination of environmental effects
are being planned and implemented worldwide.
The company is involved in several administrative and judicial proceedings
relating to environmental matters, including actions brought by the U.S.
Environmental Protection Agency (EPA) and state environmental agencies for
cleanup at approximately 40 "Superfund" or comparable sites, including the West
KL Avenue Landfill in Kalamazoo County, Mich. The company's estimate of the
ultimate cost to be incurred in connection with these environmental situations
could change due to the potential existence of joint and several liability,
possible recovery from other potentially responsible parties, the levels of
cleanup to be required and the technologies to be employed. An accrual has
been recorded, but added costs could be incurred in connection with the various
remedial actions. Although the company cannot predict the outcome of these
matters, the ultimate liability should not have a material effect on the
company's consolidated financial position; and unless there is a significant
deviation from the historical pattern of resolution of such issues, the
ultimate liability should not have a material adverse effect on
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the company's results of operations or liquidity.
Studies directed toward a final remediation plan for the site of the company's
discontinued industrial chemical operations in North Haven, Conn., are in
process. Issues related to removal of a sludge pile located on the site due to
zoning violations have been resolved with the town. The final plan of
remediation of the pile will be worked out among the company, the Connecticut
Department of Environmental Protection and the U.S. EPA with input from the
public. The company cannot at the present time predict the final resolution of
the sludge pile issue and has not established any reserves for the cost of
off-site disposal. The company believes that it has established sufficient
reserves to cover the costs of other remedial activities that may be required.
Dollar amounts in millions, except per-share data
SELECTED FINANCIAL DATA
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Years Ended December 31 1994 1993 1992 1991 1990
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Operating revenue $3,344.5 $3,380.5 $3,284.7 $3,057.9 $2,675.3
Earnings from continuing operations
before cumulative effect of
accounting changes(a) 489.1 396.4 527.0 521.5 435.9
Earnings per share from continuing
operations before cumulative effect
of accounting changes(a) 2.75 2.20 2.92 2.87 2.36
Dividends declared per share 1.48 1.48 1.42 1.26 1.04
Total assets 5,162.5 4,811.9 4,513.1 4,053.9 3,578.8
Long-term debt 521.0 526.8 402.9 295.5 274.6
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(a)Refer to Note D relating to January 1, 1993 accounting changes resulting in
a net charge of $18.9 or $.11 per share and to January 1, 1992 accounting
changes resulting in a net charge of $222.9 or $1.26 per share.
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REPORTS OF MANAGEMENT AND INDEPENDENT ACCOUNTANTS
REPORT OF MANAGEMENT
The consolidated financial statements presented in this annual report have been
prepared by the company in conformity with generally accepted accounting
principles. The management of The Upjohn Company is responsible for all
information and representations made in this report and for the integrity and
objectivity of the financial statements. The statements include informed
judgments and estimates necessary for their preparation.
The company maintains systems of internal controls over financial reporting
that provide reasonable assurance that assets are safeguarded from unauthorized
use or disposition, that transactions are properly recorded and that financial
statements conform in all material respects with generally accepted accounting
principles. Systems, financial policies, and procedures related to internal
controls over financial reporting are documented and communicated to employees
responsible for accounting and reporting activities. The systems are
continually reviewed and modified, where appropriate.
Internal auditors, using audit programs designed to determine compliance with
financial policies and procedures and the systems of internal controls over
financial reporting, independently monitor the effectiveness of the company's
application of these control systems. Their findings are reported to operating
management for resolution as needed.
The selection of the company's independent accountants, Coopers & Lybrand,
L.L.P., has been approved by the Board of Directors. The examination of the
company's consolidated financial statements by the independent accountants is
made in accordance with generally accepted auditing standards and is
coordinated with the company's program of internal audit.
An audit committee of the Board of Directors, composed solely of directors who
are not employees of the company, oversees the company's financial reporting
process. The committee meets with and reviews the activities of corporate
financial management, internal auditors, and independent accountants to
ascertain that each is properly discharging its responsibilities. The
independent accountants and internal auditors have access to the audit
committee to discuss the results of their work, the adequacy of internal
controls over financial reporting and the quality of financial reporting.
John L. Zabriskie, Ph.D.
Chairman of the Board
and Chief Executive Officer
Robert C. Salisbury
Executive Vice President
and Chief Financial Officer
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REPORT OF INDEPENDENT ACCOUNTANTS
To The Shareholders and Board of Directors
The Upjohn Company
We have audited the consolidated balance sheets of The Upjohn Company and
Subsidiaries as of December 31, 1994 and 1993, and the related consolidated
statements of earnings, shareholders' equity, and cash flows for the years
1994, 1993 and 1992. These financial statements are the responsibility of The
Upjohn Company's management. Our responsibility is to express an opinion on
these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above (pages
30 to 45) present fairly, in all material respects, the consolidated financial
position of The Upjohn Company and Subsidiaries as of December 31, 1994 and
1993, and the consolidated results of their operations and their cash flows for
the years 1994, 1993 and 1992, in conformity with generally accepted accounting
principles.
As discussed in Notes D and T to the consolidated financial statements, the
company changed its practice of reporting certain majority-owned subsidiaries
from a fiscal year ending November 30 to a calendar year ending December 31 and
its method of accounting for postemployment benefits during 1993. As discussed
in Note D in 1992, the company changed its method of accounting for income
taxes and other postretirement benefits.
Coopers & Lybrand, L.L.P.
Chicago, Illinois
January 26, 1995
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CONSOLIDATED STATEMENTS OF EARNINGS
The Upjohn Company and Subsidiaries
Dollar amounts in thousands, except per-share data
------------------------------------------------------------------------------------------------------------------
For the years ended December 31 1994 1993 1992
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OPERATING REVENUE:
Net sales $3,274,996 $3,339,957 $3,256,188
Other revenue 69,542 40,579 28,560
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Total 3,344,538 3,380,536 3,284,748
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OPERATING COSTS AND EXPENSES:
Cost of products sold 843,152 783,590 754,483
Research and development 607,187 612,490 553,297
Marketing and administrative 1,294,752 1,316,138 1,292,204
Restructuring 208,789 22,055
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Total 2,745,091 2,921,007 2,622,039
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OPERATING INCOME 599,447 459,529 662,709
Interest income 59,624 50,789 50,054
Interest expense (24,600) (31,496) (31,253)
Foreign exchange losses (1,087) (4,556) (3,397)
All other, net 9,912 5,771 (6,210)
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EARNINGS FROM CONTINUING OPERATIONS BEFORE
INCOME TAXES AND MINORITY EQUITY 643,296 480,037 671,903
Provision for income taxes 154,400 84,201 145,900
Minority equity in losses (192) (535) (987)
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EARNINGS FROM CONTINUING OPERATIONS 489,088 396,371 526,990
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DISCONTINUED OPERATIONS:
Earnings from operations (net of tax) 2,672 10,006 20,227
(Loss) gain on disposal of discontinued
operations (net of tax) (997) 4,926
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EARNINGS BEFORE CUMULATIVE EFFECT OF
ACCOUNTING CHANGES 490,763 411,303 547,217
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CUMULATIVE EFFECT OF ACCOUNTING CHANGES
(NET OF TAX) (18,906) (222,895)
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NET EARNINGS 490,763 392,397 324,322
Dividends on preferred stock (net of tax) 12,291 12,125 12,084
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Net earnings on common stock $ 478,472 $ 380,272 $ 312,238
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EARNINGS PER COMMON SHARE:
Primary
- Earnings from continuing operations
before accounting changes $2.75 $2.20 $2.92
- Discontinued operations .01 .09 .12
- Cumulative effect of accounting changes (.11) (1.26)
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- Net earnings $2.76 $2.18 $1.78
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Fully diluted
- Earnings from continuing operations
before accounting changes $2.67 $2.15 $2.84
- Discontinued operations .01 .08 .11
- Cumulative effect of accounting changes (.10) (1.21)
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- Net earnings $2.68 $2.13 $1.74
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The accompanying notes are an integral part of the consolidated financial
statements.
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CONSOLIDATED BALANCE SHEETS
The Upjohn Company and Subsidiaries
Dollar amounts in thousands
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December 31 1994 1993
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CURRENT ASSETS:
Cash and cash equivalents $ 502,346 $ 281,132
Trade accounts receivable, less allowance of $36,088
(1993: $40,902) 650,522 653,543
Inventories 458,676 412,626
Deferred income taxes 151,783 161,569
Other 367,111 162,746
------------------------------------------------------------------------------------------------------------------
Total current assets 2,130,438 1,671,616
------------------------------------------------------------------------------------------------------------------
NET ASSETS OF DISCONTINUED OPERATIONS 278,344
------------------------------------------------------------------------------------------------------------------
INVESTMENTS 647,092 634,431
------------------------------------------------------------------------------------------------------------------
PROPERTY, PLANT AND EQUIPMENT AT COST:
Land 45,955 42,974
Buildings and leasehold improvements 1,230,926 1,100,715
Equipment 1,526,620 1,369,342
Construction in process 276,036 328,972
------------------------------------------------------------------------------------------------------------------
3,079,537 2,842,003
Less allowance for depreciation 1,280,866 1,141,127
------------------------------------------------------------------------------------------------------------------
Net property, plant and equipment 1,798,671 1,700,876
------------------------------------------------------------------------------------------------------------------
OTHER NONCURRENT ASSETS 586,260 526,654
------------------------------------------------------------------------------------------------------------------
Total assets $5,162,461 $4,811,921
------------------------------------------------------------------------------------------------------------------
CURRENT LIABILITIES:
Short-term debt, including current maturities of
long-term debt $ 42,090 $ 35,628
Accounts payable 179,802 122,220
Compensation and vacation 110,699 78,155
Dividends payable 64,060 64,170
Income taxes payable 189,015 176,356
Other 533,274 516,594
------------------------------------------------------------------------------------------------------------------
Total current liabilities 1,118,940 993,123
------------------------------------------------------------------------------------------------------------------
LONG-TERM DEBT 520,977 526,837
------------------------------------------------------------------------------------------------------------------
GUARANTEE OF ESOP DEBT 274,800 275,000
------------------------------------------------------------------------------------------------------------------
POSTRETIREMENT BENEFIT COST 369,217 382,123
------------------------------------------------------------------------------------------------------------------
OTHER NONCURRENT LIABILITIES 391,654 404,950
------------------------------------------------------------------------------------------------------------------
DEFERRED INCOME TAXES 99,238 91,624
------------------------------------------------------------------------------------------------------------------
MINORITY EQUITY IN SUBSIDIARIES 5,017 52,614
------------------------------------------------------------------------------------------------------------------
SHAREHOLDERS' EQUITY:
Preferred stock, one dollar par value; authorized
12,000,000 shares, issued Series B convertible 7,322
shares at stated value (1993: 7,379 shares) 295,079 297,387
Common stock, one dollar par value; authorized
600,000,000 shares, issued 190,589,607 shares 190,590 190,590
Capital in excess of par value 64,636 66,406
Retained earnings 2,757,260 2,535,010
Note receivable from ESOP Trust (ESOT) (33,520) (31,548)
ESOP deferred compensation (243,962) (251,301)
Currency translation adjustments (33,057) (114,198)
Treasury stock at cost, 17,447,880 shares
(1993: 17,157,689 shares) (614,408) (606,696)
------------------------------------------------------------------------------------------------------------------
Total shareholders' equity 2,382,618 2,085,650
------------------------------------------------------------------------------------------------------------------
Total liabilities and shareholders' equity $5,162,461 $4,811,921
------------------------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of the consolidated financial
statements.
13
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
The Upjohn Company and Subsidiaries
Dollar amounts in thousands
------------------------------------------------------------------------------------------------------------------
For the years ended December 31 1994 1993 1992
------------------------------------------------------------------------------------------------------------------
PREFERRED STOCK:
Balance at beginning of year $ 297,387 $ 298,224 $ 299,523
Redemptions and conversions (2,308) (837) (1,299)
------------------------------------------------------------------------------------------------------------------
Balance at end of year 295,079 297,387 298,224
------------------------------------------------------------------------------------------------------------------
COMMON STOCK:
Balance at beginning of year 190,590 190,590 190,592
Stock option, incentive and dividend
reinvestment plans (2)
------------------------------------------------------------------------------------------------------------------
Balance at end of year 190,590 190,590 190,590
------------------------------------------------------------------------------------------------------------------
CAPITAL IN EXCESS OF PAR VALUE:
Balance at beginning of year 66,406 66,668 68,400
Stock option, incentive and dividend
reinvestment plans (1,770) (262) (1,732)
------------------------------------------------------------------------------------------------------------------
Balance at end of year 64,636 66,406 66,668
------------------------------------------------------------------------------------------------------------------
RETAINED EARNINGS:
Balance at beginning of year 2,535,010 2,412,028 2,348,318
Net earnings 490,763 392,397 324,322
Cash dividends declared (256,222) (257,290) (248,528)
Dividends on preferred stock (net of tax) (12,291) (12,125) (12,084)
------------------------------------------------------------------------------------------------------------------
Balance at end of year 2,757,260 2,535,010 2,412,028
------------------------------------------------------------------------------------------------------------------
NOTE RECEIVABLE FROM ESOP TRUST (ESOT):
Balance at beginning of year (31,548) (29,697) (27,946)
Rollover of accumulated interest (1,972) (1,851) (1,751)
------------------------------------------------------------------------------------------------------------------
Balance at end of year (33,520) (31,548) (29,697)
------------------------------------------------------------------------------------------------------------------
ESOP DEFERRED COMPENSATION:
Balance at beginning of year (251,301) (258,254) (263,230)
ESOP expense recognized in excess of cash
contributions 7,339 6,953 4,976
------------------------------------------------------------------------------------------------------------------
Balance at end of year (243,962) (251,301) (258,254)
------------------------------------------------------------------------------------------------------------------
CURRENCY TRANSLATION ADJUSTMENTS:
Balance at beginning of year (114,198) (89,145) (57,323)
Translation adjustments 81,141 (25,053) (31,823)
Income taxes 1
------------------------------------------------------------------------------------------------------------------
Balance at end of year (33,057) (114,198) (89,145)
------------------------------------------------------------------------------------------------------------------
TREASURY STOCK:
Balance at beginning of year (606,696) (574,871) (553,182)
Stock option, incentive and dividend
reinvestment plans 24,133 22,264 27,498
Purchases of treasury stock (31,845) (54,089) (49,187)
------------------------------------------------------------------------------------------------------------------
Balance at end of year (614,408) (606,696) (574,871)
------------------------------------------------------------------------------------------------------------------
TOTAL SHAREHOLDERS' EQUITY $2,382,618 $2,085,650 $2,015,543
------------------------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of the consolidated financial
statements.
14
CONSOLIDATED STATEMENTS OF CASH FLOWS
The Upjohn Company and Subsidiaries
Dollar amounts in thousands
------------------------------------------------------------------------------------------------------------------
For the years ended December 31 1994 1993 1992
------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM OPERATIONS:
Net earnings $490,763 $392,397 $324,322
Adjustments to reconcile net earnings to net
cash provided (required) by operations:
Depreciation 163,370 162,559 152,596
Amortization of intangibles 11,795 10,941 12,985
Deferred income taxes 23,179 (82,407) 23,001
Restructuring 216,000 23,956
Cumulative effect of accounting changes
(net of tax) 18,906 222,895
Other (15,825) 4,609 (15,312)
Changes in:
Accounts receivable 6,263 31,167 (100,035)
Inventory (20,808) (53,344) (28,382)
Payables and accruals 63,176 (52,007) 9,779
Income taxes payable 11,417 1,279 (69,032)
Other current and noncurrent assets (38,274) 36,613 (13,884)
Other current and noncurrent liabilities 15,086 93,717 54,180
------------------------------------------------------------------------------------------------------------------
Net cash provided by operations 710,142 780,430 597,069
------------------------------------------------------------------------------------------------------------------
CASH FLOWS PROVIDED (REQUIRED) BY INVESTMENT
ACTIVITIES:
Property, plant and equipment additions (252,224) (323,510) (295,399)
Proceeds from sale of property, plant and
equipment 28,188 17,732 5,956
Proceeds from sale of investments 282,608 184,154 226,824
Purchase of investments (569,219) (249,664) (436,910)
Proceeds from the sale of discontinued
operations 307,843 31,000
Other (1,061) (1,079) 3,187
------------------------------------------------------------------------------------------------------------------
Net cash required by investment activities (203,865) (341,367) (496,342)
------------------------------------------------------------------------------------------------------------------
CASH FLOWS PROVIDED (REQUIRED) BY FINANCING
ACTIVITIES:
Proceeds from issuance of debt 14,946 340,166 121,867
Repayment of debt (45,924) (215,720) (16,247)
Debt maturing in three months or less 4,475 (191,238) 133,333
Dividends paid to shareholders (263,661) (265,337) (252,028)
Purchase of treasury stock (31,845) (54,089) (49,187)
Other 12,425 8,984 15,394
------------------------------------------------------------------------------------------------------------------
Net cash required by financing activities (309,584) (377,234) (46,868)
------------------------------------------------------------------------------------------------------------------
Effect of exchange rate changes on cash 24,521 (9,592) (2,464)
------------------------------------------------------------------------------------------------------------------
Net change in cash and cash equivalents 221,214 52,237 51,395
Cash and cash equivalents, beginning of year 281,132 226,359 168,610
------------------------------------------------------------------------------------------------------------------
Net cash of discontinued operations 2,536 6,354
------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents, end of year $502,346 $281,132 $226,359
------------------------------------------------------------------------------------------------------------------
CASH PAID DURING THE YEAR FOR:
Interest (net of capitalized) $ 29,525 $ 34,599 $ 44,219
Income taxes $127,239 $154,984 $124,249
------------------------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of the consolidated financial
statements.
15
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Dollar amounts in thousands, except per-share data
A. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION - The consolidated financial statements include the
accounts of the company and all majority-owned subsidiaries. Effective January
1, 1993, the subsidiaries with fiscal years ended November 30 changed to a
calendar-year basis (see Note D).
FOREIGN EXCHANGE - Results of operations for foreign subsidiaries, other than
those located in highly inflationary countries, are translated using the
average exchange rates during the period, while assets and liabilities are
translated into U.S. dollars using current rates. Resulting translation
adjustments are recorded as currency translation adjustments in shareholders'
equity. For subsidiaries in highly inflationary countries, currency gains and
losses resulting from translation and transactions are determined using a
combination of current and historical rates and are reported directly in the
earnings statement.
INVENTORIES - Inventories are valued at the lower of cost or market. Cost is
determined by the last-in, first-out (LIFO) method for substantially all
domestic inventories and the first-in, first-out (FIFO) method for foreign
inventories.
PROPERTY, PLANT AND EQUIPMENT - Property, plant and equipment are carried at
cost. Depreciation is computed principally on the straight-line method for
financial reporting, while accelerated methods are used for income tax
purposes. Maintenance and repair costs are charged to earnings as incurred.
Costs of renewals and improvements are capitalized. Upon retirement or other
disposition of property, any gain or loss is included in earnings.
INCOME TAXES - In accordance with SFAS No. 109, the company applies an asset
and liability approach to accounting for income taxes. Deferred tax
liabilities and assets are recognized for the expected future tax consequences
of temporary differences between the financial statement and tax bases of
assets and liabilities using enacted tax rates in effect for the year in which
the differences are expected to reverse. The company provides deferred income
taxes on subsidiaries' earnings that are not considered to be permanently
invested in those subsidiaries.
CASH EQUIVALENTS - The company considers all highly liquid debt instruments
with an original maturity of three months or less to be cash equivalents.
STATEMENTS OF CASH FLOW - The company does not restate the Statements of Cash
Flows for operations that have been discontinued.
INVESTMENTS - The company has investments in short- and long-term debt
securities that have been classified under the provisions of SFAS No. 115 as
held-to-maturity. Accordingly, these investments are measured at amortized
cost and temporary unrealized gains or losses are not recognized.
DERIVATIVE FINANCIAL INSTRUMENTS - Forward exchange contracts are used to hedge
net transaction exposures and are marked-to-market with the resulting gains and
losses recognized in earnings. Purchased foreign currency options are used to
hedge anticipated transactions and realized and unrealized gains and losses are
deferred and included as a component of the related transaction. The carrying
values of derivative financial instruments are generally reported with other
current assets or other current liabilities.
OTHER - Certain reclassifications have been made to conform prior years' data
to the current presentation including certain deferred income tax balances.
B. DISCONTINUED OPERATIONS
In December 1994, the company sold its interests in the Asgrow Seed Company.
The sale represents complete divestiture of all operations in the agronomic and
vegetable seed businesses. A loss of $997, after provisions for tax, was
realized on the sale, including accruals for certain retained liabilities.
16
In December 1993, the company sold the assets of Asgrow Florida Company. The
sale represented complete divestiture of the company's operations in the
agricultural chemical business. The gain on the sale, amounting to $4,926
after provisions for tax, included accruals for certain retained liabilities.
Operating results for the discontinued vegetable and agronomic seed and
agricultural chemical operations were:
--------------------------------------------------------------------------------------------------------------
Period ended December 31 1994 1993 1992
--------------------------------------------------------------------------------------------------------------
Operating revenue:
Agronomic and vegetable seeds $221,393 $274,215 $295,718
Agricultural chemicals 84,517 90,355
--------------------------------------------------------------------------------------------------------------
Total $221,393 $358,732 $386,073
--------------------------------------------------------------------------------------------------------------
Earnings before taxes and minority equity:
Agronomic and vegetable seeds $ 5,498 $ 10,385 $ 24,804
Agricultural chemicals 6,294 3,476
--------------------------------------------------------------------------------------------------------------
Income taxes:
Agronomic and vegetable seeds (2,500) (4,800) (7,400)
Agricultural chemicals (2,400) (700)
--------------------------------------------------------------------------------------------------------------
Minority equity in earnings (losses):
Agronomic and vegetable seeds 326 (527) (47)
--------------------------------------------------------------------------------------------------------------
Earnings from operations $ 2,672 $ 10,006 $ 20,227
--------------------------------------------------------------------------------------------------------------
Earnings per common share - primary $.01 $.09 $.12
--------------------------------------------------------------------------------------------------------------
C. RESTRUCTURING
The company incurred restructuring charges in both 1993 and 1992. In the third
quarter of 1993, restructuring charges of $208,789 ($154,566 after tax) were
recorded to reflect the costs associated with a worldwide work-force reduction
of approximately 1,500 employees ($136,109); elimination or reduction of excess
manufacturing capacity in 14 plants worldwide over the next several years
($31,631); the write-down of certain intangibles ($19,000); facilities and
equipment ($17,095); and other ($4,954).
As of December 31, 1994, approximately 1,100 employees have left the company
under the 1993 restructuring program. Of the original accrual, approximately
$30,885 remains as a current liability. There have been no adjustments to the
liabilities originally accrued for work-force reduction.
In 1992, net restructuring charges of $22,055 ($13,387 after tax) were incurred
for a special voluntary early retirement program for employees in the U.S. and
Puerto Rico and for staff reductions in various international locations. As of
December 31, 1993, over 500 employees had terminated under the 1992
restructuring program and all amounts originally accrued have been paid to
participants.
D. ACCOUNTING CHANGES
During 1993 and 1992, the company adopted three accounting statements and made
one other accounting change. The effects of these changes on prior years were
reported as the cumulative effect of accounting changes (net of tax). The
changes were as follows:
--------------------------------------------------------------------------------------------------------------
1993 1992
--------------------------------------------------------------------------------------------------------------
Change in subsidiary reporting year $ 7,791 $
Adoption of: SFAS No. 112 11,115
SFAS No. 106 235,677
SFAS No. 109 (12,782)
--------------------------------------------------------------------------------------------------------------
Cumulative effect of accounting changes $18,906 $222,895
--------------------------------------------------------------------------------------------------------------
Effective January 1, 1993, the company's subsidiaries that previously reported
on a fiscal year ending November 30 changed their reporting period to a
calendar-year basis. The change was made to accomplish more timely reporting
and to increase operating and planning efficiency. The results of operations
of these subsidiaries for the period December 1 through December 31, 1992,
constituted the accounting change that reduced after-tax earnings per share by
$.04. The cash flows of these subsidiaries for the thirteen-month period ended
December 31, 1993, are reflected in the Consolidated Statements of Cash Flows.
17
The company also adopted SFAS No. 112, "Employers' Accounting for
Postemployment Benefits," which pertains to benefits provided to former or
inactive employees after employment but before retirement. This change became
effective January 1, 1993. The cumulative effect of this change reduced
after-tax earnings per share by $.07.
Effective January 1, 1992, the company adopted SFAS No. 106, "Employers'
Accounting for Postretirement Benefits Other Than Pensions," which requires
accrual accounting for these benefits rather than cash-basis accounting. The
cumulative effect of this change reduced after-tax earnings per share by $1.33
(see Note T).
Also effective January 1, 1992, the company adopted SFAS No. 109, "Accounting
for Income Taxes," which had the cumulative effect of increasing after-tax
earnings per share by $.07 (see Note E).
E. INCOME TAXES
Earnings from continuing operations before income taxes and minority equity
were as follows:
--------------------------------------------------------------------------------------------------------------
Years ended December 31 1994 1993 1992
--------------------------------------------------------------------------------------------------------------
Domestic $533,096 $497,718 $624,595
Foreign 110,200 (17,681) 47,308
--------------------------------------------------------------------------------------------------------------
$643,296 $480,037 $671,903
--------------------------------------------------------------------------------------------------------------
Income taxes on continuing operations consisted of:
--------------------------------------------------------------------------------------------------------------
1994 1993 1992
--------------------------------------------------------------------------------------------------------------
Currently payable:
Domestic $ 92,500 $106,901 $ 70,100
Foreign 38,500 44,400 31,900
State 5,500 15,400 9,100
--------------------------------------------------------------------------------------------------------------
136,500 166,701 111,100
-------------------------------------------------------------------------------------------------------------
Deferred:
Domestic 600 (49,600) 41,500
Foreign 15,400 (25,900) (4,500)
State 1,900 (7,000) (2,200)
--------------------------------------------------------------------------------------------------------------
17,900 (82,500) 34,800
--------------------------------------------------------------------------------------------------------------
$154,400 $ 84,201 $145,900
--------------------------------------------------------------------------------------------------------------
Components of net deferred tax assets were as follows:
--------------------------------------------------------------------------------------------------------------
December 31 1994 1993
--------------------------------------------------------------------------------------------------------------
Taxed profit on intercompany transfers $ 32,628 $ 33,092
Employee benefit plans 47,627 47,833
Postretirement and postemployment benefits
other than pensions 148,685 154,031
Environmental and product accruals 105,034 105,889
Restructuring 15,496 38,935
Alternative minimum tax 41,645 23,307
All other 87,795 75,254
--------------------------------------------------------------------------------------------------------------
Total deferred tax assets
(net of valuation allowances) 478,910 478,341
--------------------------------------------------------------------------------------------------------------
Property, plant and equipment 156,927 150,589
Withholding taxes 73,189 69,689
Pension plans 57,784 47,583
All other 13,651 14,067
--------------------------------------------------------------------------------------------------------------
Total deferred tax liabilities 301,551 281,928
--------------------------------------------------------------------------------------------------------------
Net deferred tax assets $177,359 $196,413
--------------------------------------------------------------------------------------------------------------
Deferred income taxes are included in the Consolidated Balance Sheets as
follows:
--------------------------------------------------------------------------------------------------------------
December 31 1994 1993
--------------------------------------------------------------------------------------------------------------
Current assets $151,783 $161,569
Noncurrent assets 124,814 126,468
Noncurrent liabilities (99,238) (91,624)
--------------------------------------------------------------------------------------------------------------
Net deferred tax assets $177,359 $196,413
--------------------------------------------------------------------------------------------------------------
Valuation allowances of $32,413 at December 31, 1994 and $28,239 at December
18
31, 1993, were provided for deferred tax assets which are not likely to be
realized. They result primarily from the third-quarter 1993 restructuring and
other deferred tax assets at foreign locations.
Differences between the effective income tax rate and the U.S. statutory tax
rate were as follows:
--------------------------------------------------------------------------------------------------------------
Percent of pretax income 1994 1993 1992
--------------------------------------------------------------------------------------------------------------
Statutory tax rate 35.0% 35.0% 34.0%
Benefit of tax exemptions
in Puerto Rico (13.1) (22.5) (11.4)
Foreign earnings taxed at a
different effective rate 1.6 3.0 (1.3)
All other, net 0.5 2.0 0.4
--------------------------------------------------------------------------------------------------------------
Effective tax rate 24.0% 17.5% 21.7%
--------------------------------------------------------------------------------------------------------------
The effective tax rate for 1993 was 22.0 percent, excluding the favorable tax
effect resulting from the third-quarter restructuring charges and other unusual
items.
A manufacturing subsidiary operates in Puerto Rico under a tax exemption grant,
expiring in 2009, which provides for partial exemption from Puerto Rico income
and property taxes. The grant, together with Internal Revenue Code Section
936, reduced income taxes by approximately $84,300 ($.49 per share) in 1994;
$108,000 ($.62 per share) in 1993; and $76,400 ($.43 per share) in 1992.
Deferred withholding taxes have been provided on accumulated earnings in Puerto
Rico. These taxes range from 3.5 percent to 10 percent and are payable when
dividends are remitted.
At December 31, 1994, undistributed earnings of foreign subsidiaries considered
permanently invested, for which deferred income taxes have not been provided,
were $377,352.
F. EARNINGS PER COMMON SHARE
Primary earnings per share are computed by dividing net earnings available to
holders of common stock by the sum of the weighted average number of shares of
common stock outstanding plus common share equivalents principally in the form
of employee stock option awards. Fully diluted earnings per share have been
computed assuming that all of the convertible preferred stock is converted into
common shares. Under this assumption, the weighted average number of common
shares outstanding is increased accordingly, and net earnings is reduced by the
amount of an incremental Employee Stock Ownership Plan (ESOP) contribution.
This incremental contribution is the net-of-tax difference between the income
the ESOP would have received on the preferred stock and the assumed dividend
yield to be earned on the common shares.
The number of shares used for computing primary and fully diluted earnings per
share was as follows (in thousands):
--------------------------------------------------------------------------------------------------------------
1994 1993 1992
---------------------------------------------------------------------------------------------------------------
Primary 173,646 174,372 175,864
Fully diluted 181,111 181,775 183,285
---------------------------------------------------------------------------------------------------------------
G. INVENTORIES
Inventories are summarized as follows:
--------------------------------------------------------------------------------------------------------------
December 31 1994 1993
--------------------------------------------------------------------------------------------------------------
Estimated replacement cost (FIFO basis):
Pharmaceutical and other finished products $216,165 $174,615
Raw materials, supplies and work in process 382,501 369,071
--------------------------------------------------------------------------------------------------------------
598,666 543,686
Less reduction to LIFO cost (139,990) (131,060)
---------------------------------------------------------------------------------------------------------------
Inventories $458,676 $412,626
--------------------------------------------------------------------------------------------------------------
Inventories valued on the LIFO method had an estimated replacement cost (FIFO
basis) of $360,124 at December 31, 1994, and $310,906 at December 31, 1993.
19
H. INVESTMENTS
Short- and long-term investments in debt securities, essentially all of which
are held by a subsidiary operating in Puerto Rico, were as follows:
---------------------------------------------------------------------------------------------------------------
Short-term investments held-to-maturity 1994 1993
--------------------------------------------------------------------------------------------------------------
Obligations of the Commonwealth of Puerto Rico $ 56,475 $ 7,500
Bank certificates of deposit 122,500 25,000
Corporate commercial paper 14,000
Repurchase agreements 13,000
Obligations of corporations 10,000
Other 1,650 17
--------------------------------------------------------------------------------------------------------------
Total short-term investments $217,625 $32,517
--------------------------------------------------------------------------------------------------------------
All short-term investments are reported on the Consolidated Balance Sheets as
"other current assets"; and since maturities of these instruments are within
one year, the carrying amount approximates fair value.
--------------------------------------------------------------------------------------------------------------
1994 1993
----------------------------------------- ---------------------
Long-term investments AMORTIZED UNREALIZED FAIR Amortized Fair
held-to-maturity COST GAINS LOSSES VALUE Cost Value
--------------------------------------------------------------------------------------------------------------
Guaranteed by the U.S.
Government $328,777 $1,965 $21,750 $308,992 $308,750 $320,696
Obligations of the
Commonwealth of
Puerto Rico 93,028 32 2,099 90,961 80,394 83,587
Obligations guaranteed
by various banks:
Notes and other
securities 65,000 34 2,520 62,514 35,000 35,657
Certificates of
deposit 160,287 533 3,564 157,256 200,287 210,412
Obligations of
corporations 10,000 10,673
--------------------------------------------------------------------------------------------------------------
Total long-term
investments $647,092 $2,564 $29,933 $619,723 $634,431 $661,025
--------------------------------------------------------------------------------------------------------------
The unrealized losses at December 31, 1994 are considered temporary, as all
amounts are considered collectable upon maturity.
Scheduled maturities for the long-term securities held at December 31, 1994,
were as follows:
--------------------------------------------------------------------------------------------------------------
Amortized Fair
Long-term securities mature in: Cost Value
--------------------------------------------------------------------------------------------------------------
One to five years $275,734 $269,965
Six to ten years 127,575 119,848
After ten years 10,858 10,122
--------------------------------------------------------------------------------------------------------------
414,167 399,935
Mortgage-backed securities 232,925 219,788
---------------------------------------------------------------------------------------------------------------
Total long-term investments $647,092 $619,723
--------------------------------------------------------------------------------------------------------------
There were no sales of or transfers from securities classified as
held-to-maturity during the years ended December 31, 1994 or 1993.
I. LINES OF CREDIT AND LONG-TERM DEBT
The company completed a three-year revolving line of credit with six banks
during the year to support commercial paper borrowings and other corporate
purposes. All available domestic bank credit facilities at December 31, 1994,
totaling $150,000, were unused. These lines of credit do not require
compensating balances but are subject to various fees.
Total credit facilities available to various foreign subsidiaries at December
31, 1994, were $137,477, of which $99,172 were unused. The facilities are
subject to various fee and compensating balance arrangements.
Long-term debt consisted of the following:
--------------------------------------------------------------------------------------------------------------
December 31 1994 1993
--------------------------------------------------------------------------------------------------------------
20
7.5% Industrial Revenue Bonds due 2023 $ 40,000 $ 40,000
5.35-7.95% Medium-Term Notes due 1997-1999 266,000 266,000
5.875% Notes due 2000 200,000 200,000
Other 18,103 24,083
Current maturities (3,126) (3,246)
---------------------------------------------------------------------------------------------------------------
Total long-term debt $520,977 $526,837
--------------------------------------------------------------------------------------------------------------
The Medium-Term Notes were issued under 1993 and 1991 shelf registrations filed
with the Securities and Exchange Commission. Pursuant to these registrations,
the company may from time to time issue notes with varying maturities, interest
rates, and amounts up to an aggregate total of $400,000 ($100,000 under the
1993 registration and $300,000 under the 1991 registration). At December 31,
1994, $34,000 remained available for issuance under the 1991 registration and
$100,000 under the 1993 registration.
Annual aggregate maturities of long-term debt during the four years subsequent
to 1995 are: 1996 - $5,278; 1997 - $29,579; 1998 - $158,465; and 1999 -
$82,288.
The company has guaranteed $275,000 of ESOP 9.79% notes due in 2004. Principal
payments begin in 1995, at which time they will constitute compensation expense
(see Note P). Annual aggregate maturities of guaranteed debt during the five
years subsequent to 1994 are: 1995 - $200; 1996 - $7,600; 1997 - $11,500; 1998
- $16,000; and 1999 - $22,000.
J. COMMITMENTS AND OTHER CONTINGENT LIABILITIES
Future minimum payments under noncancellable operating leases at December 31,
1994, approximately 70 percent real estate and 30 percent equipment, are: 1995
- $29,520; 1996 - $15,699; 1997 - $6,053; 1998 - $2,771; 1999 - $1,653; and
later years - $13,245.
Capital asset spending approved for construction and equipment but unexpended
at December 31, 1994, was approximately $179,800.
The company has committed to make a series of investments, as certain progress
goals are met, in a company that intends to manufacture a hemoglobin-based
oxygen carrier. These investments could aggregate $179,000 over a period of
years. As of December 31, 1994, the company has invested approximately
$70,000. Also, pursuant to the agreement, the company has committed to conduct
clinical development.
The Consolidated Balance Sheets also include accruals for estimated product and
environmental liabilities. The latter includes exposures related to
discontinued operations, including the industrial chemical facility at North
Haven, Conn., and several "Superfund" sites (see Note K).
Among the sites on the U.S. Environmental Protection Agency's (EPA) National
Priorities List, in connection with which the company has been identified as a
potentially responsible party, is the West KL Avenue Landfill located in
Kalamazoo County, Mich. The company has assumed lead responsibility for
remedial action. The costs of remediation may exceed a current estimate of
approximately $40,000 (in current dollars), of which other viable settling
parties are expected to contribute more than half. Necessary accruals have
been made for the company's share of estimated costs. Portions of the
company's payments could extend over the next 30 years.
K. LITIGATION
There are various legal proceedings against the company, including a
substantial number of product liability suits claiming damages as a result of
the use of the company's products including approximately 100 cases involving
HALCION.
A shareholder class action complaint against the company and certain of its
officers and directors is pending in the federal district court for Western
Mich. claiming damages resulting from alleged misrepresentations and omissions
of information by the company concerning HALCION. The court recently denied
plaintiff's motion to certify the action as a class action. Another action
makes a derivative claim that certain directors breached their fiduciary duty
21
by allegedly failing to prevent improper practices during the clinical testing
of HALCION. Some portion of the liabilities and expenses associated with the
foregoing product liability actions may be covered by insurance, although such
matters are currently in litigation.
Another pharmaceutical company has sued the company for patent infringement
regarding the marketing of a nonprescription ibuprofen/pseudoephedrine
combination product, seeking injunction against further sales and treble
damages.
The company is also involved in several administrative and judicial proceedings
relating to environmental matters, including actions brought by the U.S. EPA
and state environmental agencies for cleanup at approximately 40 "Superfund" or
comparable sites.
The company's estimate of the ultimate cost to be incurred in connection with
these environmental situations could change due to cleanup procedures to be
employed, if any; the cost of cleanup; and the company's share of a site's
cost.
The company is a party, along with approximately 30 other defendant
manufacturers and wholesalers, in numerous state and federal civil antitrust
lawsuits brought by retail pharmacies. In the main, this series of actions
seeks treble damages and injunctive relief based on allegations of price
discrimination and price fixing with respect to the level of discounts and
rebates provided to certain favored customers but denied to the plaintiffs. It
is possible that additional cases making similar claims will be filed naming
the company as a defendant. The federal cases have been consolidated by and
transferred to the federal court for the Northern District of Illinois for
pre-trial proceedings. Various defense motions to dismiss and for summary
judgment have been denied. Discovery is in process.
Based on information currently available and the company's experience with
lawsuits of the nature of those currently filed or anticipated to be filed
which have resulted from business activities to date, the amounts accrued for
product and environmental liabilities arising from the litigation and
proceedings referred to above are considered to be adequate. Although the
company cannot predict the outcome of individual lawsuits, the ultimate
liability should not have a material effect on consolidated financial position;
and unless there is a significant deviation from the historical pattern of
resolution of such issues, the ultimate liability should not have a material
adverse effect on the company's results of operations or liquidity.
Studies directed toward a determination of a final remediation plan for the
site of the company's discontinued industrial chemical operations in North
Haven, Conn. are in process. Issues related to removal of a sludge pile
located on the site due to zoning violations have been resolved with the town.
The final plan of remediation of the pile will be worked out among the company,
the Connecticut Department of Environmental Protection, and the U.S. EPA with
input from the public. The company cannot at the present time predict the
final resolution of the sludge pile issue. Because the company believes
in-place closure of the sludge pile is the most responsible course of action
and the Connecticut Department of Environmental Protection and the U.S. EPA
have earlier approved the company's plan for in-place closure of the sludge
pile, which is substantially less expensive than removal, the company has not
established any reserves for the cost of off-site disposal. The company
believes that it has established sufficient reserves to cover the costs of
other remedial activities that may be required.
L. DERIVATIVE FINANCIAL INSTRUMENTS
The company utilizes derivative financial instruments in conjunction with its
foreign currency risk management programs and does not use such instruments for
trading purposes. These programs include the creation of designated hedges of
the net foreign currency transaction exposures of certain significant
international subsidiary operations. There were no hedges of anticipated
transactions at December 31, 1994.
The company's program to hedge net foreign currency transaction exposures is
designed to protect operating results and cash flows from potential adverse
effects of foreign currency fluctuations related to intercompany and selected
22
third-party transactions. The hedging activities seek to limit this risk by
offsetting the gains and losses on the underlying exposures with losses and
gains on the instruments utilized to create the hedge. This program utilizes
over-the-counter forward exchange contracts with terms consistent with the
underlying exposures. These contracts generally have maturities that do not
exceed 12 months and require the company to exchange currencies at agreed-upon
rates at maturity.
At December 31, 1994, the notional amount of the company's outstanding foreign
exchange forward contracts held related to the net transaction exposure hedging
program was $171,318. Of these contracts, approximately 54 percent was
denominated in European currencies, 8 percent denominated in Australian
dollars, and 6 percent denominated in Japanese yen, all against the U.S.
dollar; and 32 percent denominated in Japanese Yen against various European
currencies. Maturities on these contracts extend through November 1995.
The counterparties to these contracts consist of a limited number of major
international financial institutions. The company does not expect any losses
from credit exposure due to review and control procedures established by
corporate policy.
M. FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amounts and estimated fair values of the company's financial
instruments were as follows:
---------------------------------------------------------------------------------------------------------------
1994 1993
---------------------------------------------------------------------------------------------------------------
CARRYING FAIR Carrying Fair
AMOUNT VALUE Amount Value
--------------------------------------------------------------------------------------------------------------
Financial assets:
Short-term investments and
current maturities of long-
term investments $217,625 $217,625 $ 32,517 $ 32,517
Foreign exchange forward
contracts 1,095 1,095 162 162
Long-term investments 647,092 619,723 634,431 661,025
Financial liabilities:
Short-term debt 42,090 42,090 35,628 35,628
Long-term debt 520,977 490,000 526,837 542,000
Guaranteed debt 274,800 293,000 275,000 333,000
---------------------------------------------------------------------------------------------------------------
The following methods and assumptions were used to estimate the fair value of
each class of financial instruments:
Cash, cash equivalents and accounts receivable - The carrying value
approximates fair value.
Short-term investments and current maturities of long-term investments - The
carrying values of instruments maturing within one year are considered to
approximate fair value because of the short maturities of those instruments.
These instruments are reported with other current assets.
Foreign exchange forward contracts - The fair value was estimated utilizing an
externally developed software module which incorporates foreign exchange rates
obtained from a quotation service. These contracts are reported with other
current assets.
Long-term investments - The fair value of long-term investments is based on
estimates received from brokers, by reference to a quotation service, and by
computations based on future cash flows that were applied individually to the
instruments as applicable.
Short-term debt and accounts payable - The carrying value approximates fair
value.
Long-term and guaranteed debt - The fair value was estimated by reference to
the public exchange market for the traded long- and medium-term securities of
the company. Estimates of fair value were utilized for other long-term debt.
23
N. CONCENTRATIONS OF CREDIT RISK
The company invests excess cash in deposits with major banks throughout the
world and in high quality short-term liquid instruments. Such investments are
made only in instruments issued or enhanced by high quality financial
institutions (investment grade or better). Amounts invested in a single
institution are limited to minimize risk. The company has not incurred losses
related to these investments.
The company sells a broad range of pharmaceutical products to a diverse group
of customers operating throughout the world. In the U.S. and Japan, the
company makes substantial sales to relatively few large wholesale customers.
Credit limits, ongoing credit evaluation, and account monitoring procedures are
utilized to minimize the risk of loss. Collateral is generally not required.
O. SHAREHOLDERS' EQUITY
PREFERRED STOCK - The Series B Convertible Perpetual Preferred Stock is held by
The Upjohn Company Employee Stock Ownership Trust (ESOT). The per-share stated
value is $40,300, and the preferred stock ranks senior to the company's common
stock as to dividends and liquidation rights. Each share is convertible, at
the holder's option, into 1,000 shares of the company's common stock and has
voting rights equal to 1,000 shares of common. The company may redeem the
preferred stock at any time after July 20, 1999, or upon termination of the
ESOP at a minimum price of $40,300 per share. Dividends, at the rate of 6.25
percent, are cumulative, paid quarterly and charged against retained earnings.
COMMON STOCK - The number of common shares outstanding at December 31 was:
1994 - 173,141,727; 1993 - 173,431,918; and 1992 - 174,580,928. The number of
treasury shares acquired, net of shares issued for stock option, dividend
reinvestment, and employee benefit plans was: 1994 - 290,191; 1993 -
1,149,010; and 1992 - 632,213.
On a per-share basis, dividends were declared on common stock at the rate of
$1.48 in both 1994 and 1993 and $1.42 in 1992. Dividends payable were $64,060
and $64,170 at December 31, 1994 and 1993, respectively.
NOTE RECEIVABLE FROM ESOT - The note matures on February 1, 2005; bears
interest at 6.25 percent; and may be repaid, in whole or in part, at any time.
Accrued interest at the end of any calendar year shall be added to the note
principal.
ESOP DEFERRED COMPENSATION - Upon recognition of the company's guarantee of the
debt of the ESOT, an offsetting charge was made to shareholders' equity
referred to as "ESOP deferred compensation." To the extent the company
recognizes expense more rapidly than the corresponding cash contributions are
made, this balance will be reduced. The balance will also diminish to the
extent the company's ESOT debt guarantee commitment is reduced beginning in
1995 (see Notes I and P).
P. EMPLOYEE STOCK OWNERSHIP PLAN (ESOP)
The ESOP is a funding vehicle for the Upjohn Employee Savings Plan that covers
substantially all U.S. employees. As the ESOT makes debt principal and
interest payments, a proportionate amount of preferred stock is released for
allocation to plan participants. The preferred shares are allocated to
participants' accounts based upon their respective savings plan contributions
and the dividends earned on their previously allocated preferred shares. As of
December 31, 1994, 974.8 preferred shares had been released and allocated;
280.8 shares were released but unallocated; and 6,066.4 shares remained
unrealeased, of which 73.4 shares are committed to be released.
Under the agreement whereby the company has guaranteed the $275,000 of
third-party debt of the ESOT, the company is obligated to contribute sufficient
cash annually to the ESOT to enable it to make required principal and interest
payments. The company satisfies this annual cash flow requirement through
payment of dividends on all preferred shares outstanding plus cash
contributions. The company has fully and unconditionally guaranteed the
24
ESOT's payment obligations whether at maturity, upon redemption, upon
declaration of acceleration, or otherwise. The holders of the debt securities
have no recourse against the assets of the ESOT except in the event that the
ESOT defaults on payments due and the company also fails to make such payments.
In that event, the holders may have recourse against unallocated funds held by
the ESOT. At December 31, 1994, assets of the ESOT consisted primarily of
$295,079 of Upjohn Company Series B Convertible Perpetual Preferred Stock.
Company expense is determined pursuant to the consensus position of the
Emerging Issues Task Force (Issue No. 89-8). A portion of future debt
principal payments is attributed to each year of the plan based on the number
of shares allocated during the period. This accelerated principal amount is
combined with debt interest and factored by 80 percent. From this
formula-driven amount, the company deducts interest earned on the note
receivable from the ESOT and dividends paid on all preferred stock held by the
ESOT to arrive at net ESOP expense.
Key measures of the ESOP were:
---------------------------------------------------------------------------------------------------------------
Years ended December 31 1994 1993 1992
---------------------------------------------------------------------------------------------------------------
Interest expense of ESOT $28,895 $28,779 $28,669
Dividend income of ESOT 18,489 18,606 18,686
Company contribution to ESOT 8,001 7,870 7,511
Company ESOP expense (net) 13,368 12,344 11,972
--------------------------------------------------------------------------------------------------------------
Q. EMPLOYEE STOCK OPTIONS
Employee stock options have a 10-year duration and are exercisable after one
year of employment following the grant date. At December 31, 1994, 808 current
and former employees held options for 9,860,994 shares, of which 8,090,464 were
exercisable. Options for 3,502,184 shares, 5,343,311 shares and 7,270,754
shares were available for future grants at December 31, 1994, 1993 and 1992,
respectively.
Under the plan, upon the stock-for-stock exercise of any nonqualified or
incentive stock options granted in 1991 or thereafter, an active employee will
receive a new, nonqualified "reloaded" stock option at the then-current market
price for the number of shares surrendered to exercise an option. The
"reloaded" stock option will have an exercise term equal to the time remaining
of the original exercised option. Officers subject to SEC Section 16(b) have a
four-year period before their shares become exercisable, while other
participants have a six-month waiting period.
Changes in outstanding options were as follows:
------------------------------------------------------------------------------------------------------------
Option Price Number
Per Share of Shares
------------------------------------------------------------------------------------------------------------
Balance outstanding,
January 1, 1992 $ 7.88-46.13 5,863,407
Granted 30.00-45.19 1,901,929
Exercised 7.88-46.13 (319,237)
Canceled 30.88-45.19 (287,938)
------------------------------------------------------------------------------------------------------------
Balance outstanding,
December 31, 1992 $ 8.92-46.13 7,158,161
Granted 28.19-32.25 2,127,443
Exercised 8.92-31.75 (48,221)
Canceled 9.44-46.13 (486,955)
------------------------------------------------------------------------------------------------------------
Balance outstanding,
December 31, 1993 $ 9.44-46.13 8,750,428
Granted 28.63-35.94 1,927,721
Exercised 9.44-35.13 (275,693)
Canceled 9.44-46.13 (541,462)
------------------------------------------------------------------------------------------------------------
BALANCE OUTSTANDING,
DECEMBER 31, 1994 $12.33-46.13 9,860,994
------------------------------------------------------------------------------------------------------------
R. SHAREHOLDER RIGHTS PLAN
Pursuant to the company's shareholder rights plan, each share of the company's
common stock includes one-third of a right. Each full right, which becomes
25
exercisable 10 days after a shareholder has acquired 20 percent or more or
commenced a tender offer for 30 percent or more of the company's stock, will
entitle the holder to purchase stock at an exercise price of $400 having a
market value of $800. In lieu of cash payment, the company has the option to
exchange common stock for the rights. The rights are redeemable for $.05 per
right during a period up to 30 days after 20 percent or more of the company's
stock has been acquired. The rights will expire on June 26, 1996, unless
redeemed earlier by the company.
S. RETIREMENT BENEFITS
The company and its subsidiaries have various pension plans covering
substantially all employees. The following table summarizes the funded status
of these plans:
------------------------------------------------------------------------------------------------------------
December 31 1994 1993
------------------------------------------------------------------------------------------------------------
Vested benefit obligation $508,660 $ 564,599
------------------------------------------------------------------------------------------------------------
Accumulated benefit obligation $575,444 $ 637,179
------------------------------------------------------------------------------------------------------------
Projected benefit obligation $816,316 $ 904,122
Plan assets at fair value 940,133 1,016,045
------------------------------------------------------------------------------------------------------------
Plan assets in excess of projected
benefit obligation 123,817 111,923
Unrecognized net losses 78,456 64,856
Unamortized net asset at adoption (85,579) (96,753)
Unrecognized prior service cost 44,250 52,843
------------------------------------------------------------------------------------------------------------
Prepaid pension cost $160,944 $ 132,869
------------------------------------------------------------------------------------------------------------
The U.S. plans comprise the majority of the amounts reflected above. The 1993
early retirement inducement caused a higher-than-normal payout of lump-sum
benefits in 1994, diminishing the projected benefit obligation as well as plan
assets. Further reducing the projected benefit obligation was the increase at
year end of the discount rate in the U.S. to 8.5 percent from 7.5 percent. The
assets of the domestic plans are invested approximately two-thirds in equity
securities. Fair value is determined principally by reference to publicly
quoted year-end prices. Accrued unfunded foreign separation pay plans not
reflected in the funded status summary above totaled $14,300 and $14,000 at
December 31, 1994 and 1993, respectively.
The consolidated net pension expense amounts reflected below are for continuing
operations and are exclusive of the added costs associated with early
retirement inducements offered in 1993 and 1992. These incremental charges of
$15,000 before tax in 1993 and $7,000 before tax, net of a settlement gain, in
1992 are included in restructuring costs. Also, as a result of the company's
divestiture of the Asgrow Seed Company in 1994, it recognized a $3,050 gain
related to the curtailment of the Asgrow Pension Plan. This curtailment gain
is reflected in the Consolidated Statement of Earnings as a component of the
loss on disposal of discontinued operations rather than in the data below.
------------------------------------------------------------------------------------------------------------
Years ended December 31 1994 1993 1992
------------------------------------------------------------------------------------------------------------
Service cost - benefits
earned during the year $43,362 $38,638 $35,011
Interest cost on projected
benefit obligation 61,565 58,749 55,916
Actual return on plan assets 10,623 (135,040) (57,925)
Net amortization and deferral (93,121) 57,082 (22,202)
------------------------------------------------------------------------------------------------------------
Net pension expense $22,429 $19,429 $10,800
------------------------------------------------------------------------------------------------------------
Assumptions used for net pension expense (U.S.):
------------------------------------------------------------------------------------------------------------
1994 1993 1992
------------------------------------------------------------------------------------------------------------
Discount rate 7.5 % 8.25% 8.25%
Salary growth rate 4.75% 5.5 % 5.5 %
Return on plan assets 9.5 % 9.5 % 9.5 %
------------------------------------------------------------------------------------------------------------
T. OTHER POSTRETIREMENT AND POSTEMPLOYMENT BENEFITS
The company provides nonpension benefits to eligible retirees and their
dependents, primarily in the form of medical and dental benefits.
26
The following table summarizes the funded status of these plans:
----------------------------------------------------------------------------------------------------------
December 31 1994 1993
----------------------------------------------------------------------------------------------------------
Actuarial present value of benefit obligation:
Retirees $ 140,978 $ 168,468
Fully eligible active participants 10,250 10,832
Other active participants 158,006 167,292
----------------------------------------------------------------------------------------------------------
Accumulated postretirement benefit obligation 309,234 346,592
Plan assets at fair value 73,312 56,037
----------------------------------------------------------------------------------------------------------
Accumulated postretirement benefit
obligation in excess of plan assets (235,922) (290,555)
Unrecognized net gains (81,079) (31,682)
Unrecognized prior service cost (52,216) (59,886)
----------------------------------------------------------------------------------------------------------
Accrued postretirement benefit cost $(369,217) $(382,123)
----------------------------------------------------------------------------------------------------------
The accumulated postretirement benefit obligation declined at December 31,
1994, due principally to an increase in the discount rate to 8.5 percent from
7.5 percent at December 31, 1993.
A Voluntary Employee Benefit Association (VEBA) or 501(c)(9) trust has been
established for the purpose of partially funding the company's obligations
under the plans. The funds are presently invested in long-term securities.
The fair value of plan assets was established by the trustee of the fund.
Future contributions are at the discretion of the company.
The composition of expense for the postretirement benefit plan is as follows:
----------------------------------------------------------------------------------------------------------
Years ended December 31 1994 1993 1992
------------------------------------------------------------------------------------------------------------
Service cost $11,305 $14,085 $14,605
Interest cost 24,585 30,825 30,607
Actual return on plan assets 766 (2,914) 1,369
Net amortization and deferral (10,064) (324) (2,469)
------------------------------------------------------------------------------------------------------------
26,592 41,672 44,112
Portion attributable to discontinued
operations (1,435) (2,294) (2,333)
------------------------------------------------------------------------------------------------------------
Net postretirement benefit cost,
continuing operations $25,157 $39,378 $41,779
------------------------------------------------------------------------------------------------------------
The assumptions used to develop the net postretirement benefit cost are as
follows:
------------------------------------------------------------------------------------------------------------
Years ended December 31 1994 1993 1992
------------------------------------------------------------------------------------------------------------
Discount rate 7.5% 8.25% 8.25%
Return on plan assets 9.5% 9.5% 9.5%
Weighted average health care cost
trend rates:
Initially 7.7% 10.6% 11.1%
Trending down to 5.5% 6.0% 6.0%
------------------------------------------------------------------------------------------------------------
The health care cost trend rate has a significant effect on the amounts
reported. For example, increasing the rate by one percentage point in each
year would increase the accumulated postretirement benefit obligation as of
December 31, 1994, by approximately $40,000 and the total of service and
interest cost components of net postretirement benefit cost for the year then
ended by approximately $5,600.
As a result of the company's divestiture of the Asgrow Seed Company in 1994, it
recognized a $7,750 gain related to the curtailment of its postretirement
benefit plan. This curtailment gain is reflected in the Consolidated
Statements of Earnings as a component of the loss on disposal of discontinued
operations.
The company adopted SFAS No. 112, "Employers' Accounting for Postemployment
Benefits," effective January 1, 1993. The cumulative effect on earnings of
this change in accounting was a one-time charge of $18,000 or $11,115 after tax
($.07 per share). The incremental expense recognized for these benefits in
1993 and 1994 has not been material.
U. SEGMENT OPERATIONS
The company operates in one industry, Pharmaceutical Products, which includes
27
prescription and nonprescription products for both humans and animals. No
single customer accounts for 10 percent or more of the company's consolidated
sales.
The table below shows the company's operations by geographic area. All the
sales are shown by the originating area. U.S. exports to third-party
customers are less than 10 percent. Sales to affiliates between geographic
areas are priced to reflect consideration of economic circumstances and the
regulations of countries in which the transferring entities are located. These
transfers, which are primarily human-use products from the U.S., are eliminated
in consolidation.
Geographic areas for
----------------------------------------------------------------------------------------------------------
years ended December 31 1994 1993 1992
----------------------------------------------------------------------------------------------------------
SALES TO UNAFFILIATED CUSTOMERS
(INCLUDES EXPORTS):
United States $1,948,215 $2,150,778 $2,092,131
Europe 638,733 571,112 597,984
Japan and Pacific 425,790 394,741 353,919
Other foreign 262,258 223,326 212,154
----------------------------------------------------------------------------------------------------------
INTERAREA SALES TO AFFILIATES FROM:
United States 400,761 354,528 356,297
Europe 119,254 117,142 110,590
Japan and Pacific 2,245 2,559 1,201
Other foreign 12,715 10,627 10,205
Eliminations (534,975) (484,856) (478,293)
----------------------------------------------------------------------------------------------------------
$3,274,996 $3,339,957 $3,256,188
----------------------------------------------------------------------------------------------------------
EARNINGS FROM CONTINUING OPERATIONS
BEFORE INCOME TAXES AND MINORITY
EQUITY:
United States $ 533,096 $ 497,718 $ 624,595
Europe 43,705 (38,842) 10,757
Japan and Pacific 22,666 24,065 5,478
Other foreign 43,829 (2,904) 31,073
----------------------------------------------------------------------------------------------------------
$ 643,296 $ 480,037 $ 671,903
----------------------------------------------------------------------------------------------------------
Identifiable assets, December 31:
United States $3,867,905 $3,387,980 $3,085,793
Europe 650,193 570,723 617,199
Japan and Pacific 485,049 427,395 380,592
Other foreign 159,314 147,479 150,357
Discontinued operations (net) 278,344 279,158
----------------------------------------------------------------------------------------------------------
$5,162,461 $4,811,921 $4,513,099
----------------------------------------------------------------------------------------------------------
V. FOREIGN OPERATIONS
The consolidated financial statements include amounts related to foreign
operations as follows:
----------------------------------------------------------------------------------------------------------
December 31 1994 1993
----------------------------------------------------------------------------------------------------------
Working capital $490,618 $457,054
Net property and other assets 468,591 447,835
Noncurrent liabilities (97,507) (91,671)
Minority equity (5,017) (52,614)
----------------------------------------------------------------------------------------------------------
Equity in foreign net assets $856,685 $760,604
----------------------------------------------------------------------------------------------------------
The reported value of and, potentially, the cash flow from foreign working
capital and net investments are subject to fluctuations in the value of the
U.S. dollar relative to the respective foreign currencies in which the net
assets are denominated.
Foreign exchange losses included in earnings, net of minority equity and taxes,
were ($29) in 1994; ($2,226) in 1993; and ($838) in 1992.
W. OTHER INFORMATION
----------------------------------------------------------------------------------------------------------
Years ended December 31 1994 1993 1992
----------------------------------------------------------------------------------------------------------
Interest cost incurred $36,703 $47,195 $42,261
Less: Capitalized on construction 12,103 15,699 11,008
----------------------------------------------------------------------------------------------------------
Interest expense $24,600 $31,496 $31,253
----------------------------------------------------------------------------------------------------------
28
Weighted average interest rate on short-
term borrowings at end of period
Domestic - - 3.6%
International 6.65% 8.4% 11.2%
----------------------------------------------------------------------------------------------------------
29
ELEVEN-YEAR SUMMARY OF CONTINUING OPERATIONS
The Upjohn Company and Subsidiaries
ANNUAL GROWTH RATES - PERCENT Dollar amounts in millions, except per-share data
----------------------------- -----------------------------------------------------------------------------------
10-Year 5-Year
1985-1994 1990-1994 Years ended December 31 1994 1993
-------------------------- -------------------------------------------------------------------------------------
OPERATING RESULTS:
8 6 Sales to domestic destinations $1,847.5 $2,046.5
10 8 Sales to foreign destinations 1,427.5 1,293.5
24 57 Other revenue 69.5 40.5
-------------------------------------------------------------------------------------------------------------------
9 7 Operating revenue 3,344.5 3,380.5
-------------------------------------------------------------------------------------------------------------------
7 9 Cost of products sold 843.1 783.6
9 8 Research and development 607.2 612.5
10 8 Marketing and administrative 1,294.8 1,316.1
Restructuring 208.8
-------------------------------------------------------------------------------------------------------------------
9 7 Operating costs and expenses 2,745.1 2,921.0
-------------------------------------------------------------------------------------------------------------------
8 5 Operating income 599.4 459.5
Nonoperating and minority interest 44.1 21.1
8 Provision for income taxes (154.4) (84.2)
-------------------------------------------------------------------------------------------------------------------
11 9 Earnings from continuing operations 489.1 396.4
Earnings (losses) from discontinued
operations 1.7 14.9
Cumulative effect of accounting changes
(net of tax) (18.9)
-------------------------------------------------------------------------------------------------------------------
11 23 Net earnings 490.8 392.4
Dividends on preferred stock
(net of tax) 12.3 12.1
-------------------------------------------------------------------------------------------------------------------
11 22 Net earnings on common stock $ 478.5 $ 380.3
-------------------------------------------------------------------------------------------------------------------
12 10 Primary earnings per share-continuing
operations after accounting changes $2.75 $2.09
11 24 Primary earnings per share-net earnings $2.76 $2.18
-------------------------------------------------------------------------------------------------------------------
FINANCIAL POSITION:
10 5 Trade accounts receivable, net $ 650.5 $ 653.5
6 10 Inventories 458.7 412.6
16 15 Other current assets 1,021.2 605.5
-------------------------------------------------------------------------------------------------------------------
11 10 Total current assets 2,130.4 1,671.6
Net assets of discontinued operations 278.3
10 8 Property, plant & equipment, net 1,798.7 1,700.9
11 25 Other assets 1,233.4 1,161.1
-------------------------------------------------------------------------------------------------------------------
9 10 Total assets 5,162.5 4,811.9
9 8 Less: Current liabilities 1,118.9 993.1
8 25 Long-term and guaranteed ESOP debt 795.8 801.8
19 18 Other liabilities 865.2 931.3
-------------------------------------------------------------------------------------------------------------------
8 7 Shareholders' equity $2,382.6 $2,085.7
-------------------------------------------------------------------------------------------------------------------
COMMON STOCK DATA:
(1) (1) Common shares outstanding (thousands) 173,142 173,432
11 6 Number of common shareholders 46,622 46,681
13 9 Total common dividends paid $256.2 $257.7
8 8 Shareholders' equity per common share $13.76 $12.03
13 10 Dividends paid per common share $1.48 $1.48
-------------------------------------------------------------------------------------------------------------------
OTHER DATA:
(1) (1) Employees 16,900 17,400
8 2 Additions of property, plant & equipment $252.2 $311.6
Return on average equity-continuing
operations before accounting changes 21.9% 19.3%
-------------------------------------------------------------------------------------------------------------------
Shares outstanding and per-share data reflect a
three-for-one stock split effective April 6,
1987, and a two-for-one stock split effective
April 7, 1986.
30
1992 1991 1990 1989 1988 1987 1986 1985 1984
------------------------------------------------------------------------------------------------------------------
$2,002.6 $1,878.9 $1,582.5 $1,388.8 $1,245.8 $1,158.9 $1,070.9 $ 935.4 $ 882.3
1,253.6 1,157.2 1,082.9 986.2 966.5 844.7 722.4 604.1 568.5
28.5 21.8 9.9 7.3 6.4 6.8 9.3 7.1 8.4
-----------------------------------------------------------------------------------------------------------------
3,284.7 3,057.9 2,675.3 2,382.3 2,218.7 2,010.4 1,802.6 1,546.6 1,459.2
-----------------------------------------------------------------------------------------------------------------
754.5 668.5 620.5 546.7 520.5 491.5 486.6 439.3 419.6
553.3 496.9 431.7 411.5 386.4 363.2 318.9 288.8 250.9
1,292.2 1,205.4 1,032.2 901.7 816.2 736.2 642.7 544.9 517.5
22.0 5.0 (36.6) 55.8
-----------------------------------------------------------------------------------------------------------------
2,622.0 2,375.8 2,047.8 1,915.7 1,723.1 1,590.9 1,448.2 1,273.0 1,188.0
-----------------------------------------------------------------------------------------------------------------
662.7 682.1 627.5 466.6 495.6 419.5 354.4 273.6 271.2
10.2 9.6 (6.7) .9 (2.1) (12.2) (17.5) (14.3) (33.4)
(145.9) (170.2) (184.9) (151.2) (140.9) (118.3) (95.8) (79.5) (69.6)
-----------------------------------------------------------------------------------------------------------------
527.0 521.5 435.9 316.3 352.6 289.0 241.1 179.8 168.2
20.2 15.9 19.8 (140.3) .8 16.0 11.5 23.2 5.1
(222.9)
-----------------------------------------------------------------------------------------------------------------
324.3 537.4 455.7 176.0 353.4 305.0 252.6 203.0 173.3
12.1 12.3 12.4
-----------------------------------------------------------------------------------------------------------------
$ 312.2 $ 525.1 $ 443.3 $ 176.0 $ 353.4 $ 305.0 $ 252.6 $ 203.0 $ 173.3
-----------------------------------------------------------------------------------------------------------------
$ 1.66 $ 2.87 $ 2.36 $ 1.70 $ 1.89 $ 1.53 $ 1.29 $ .97 $ .91
$ 1.78 $ 2.96 $ 2.47 $ .95 $ 1.89 $ 1.61 $ 1.35 $ 1.10 $ .94
-----------------------------------------------------------------------------------------------------------------
$ 698.5 $ 625.0 $ 563.7 $ 505.2 $ 492.3 $ 414.3 $ 383.7 $ 288.1 $ 242.9
389.5 355.8 312.5 282.3 274.0 265.2 239.0 256.3 263.6
557.0 470.4 527.5 511.6 489.9 587.8 388.2 399.8 234.0
-----------------------------------------------------------------------------------------------------------------
1,645.0 1,451.2 1,403.7 1,299.1 1,256.2 1,267.3 1,010.9 944.2 740.5
279.1 270.5 252.3 230.7 249.1 239.0 202.6 199.6 260.3
1,596.1 1,469.2 1,349.0 1,205.7 1,144.3 1,023.4 899.4 774.7 692.8
992.9 863.0 573.8 401.6 386.9 410.7 471.8 382.7 448.5
-----------------------------------------------------------------------------------------------------------------
4,513.1 4,053.9 3,578.8 3,137.1 3,036.5 2,940.4 2,584.7 2,301.2 2,142.1
1,063.2 970.7 775.4 758.4 668.3 590.3 493.2 459.7 474.3
677.9 570.5 549.6 256.4 257.3 435.0 421.9 376.2 382.0
756.5 507.5 474.2 386.2 290.0 241.6 199.4 170.2 151.6
-----------------------------------------------------------------------------------------------------------------
$2,015.5 $2,005.2 $1,779.6 $1,736.1 $1,820.9 $1,673.5 $1,470.2 $1,295.1 $1,134.2
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174,581 175,215 176,408 183,927 185,258 187,061 187,307 186,081 183,917
42,226 36,531 34,649 35,430 33,421 28,497 17,034 15,288 15,935
$ 243.5 $ 213.5 $ 178.8 $ 168.6 $ 141.5 $ 108.2 $ 92.6 $ 80.8 $ 78.2
$ 11.55 $ 11.44 $ 10.09 $ 9.44 $ 9.83 $ 8.95 $ 7.85 $ 6.96 $ 6.17
$ 1.39 1.21 $ 1.00 $ .91 $ .76 $ .58 $ .50 $ .44 $ .43
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17,700 17,800 17,200 17,600 18,100 18,300 18,400 18,400 18,000
$ 285.2 $ 268.3 $ 236.4 $ 228.5 $ 225.8 $ 201.7 $ 190.4 $ 137.7 $ 116.7
26.2% 27.6% 24.8% 17.8% 20.2% 18.4% 17.4% 14.8% 15.4%
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31
QUARTERLY DATA
The Upjohn Company and Subsidiaries
Dollars in millions, except per-share data
QUARTERLY DATA (Unaudited) 1994 1993
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FIRST SECOND THIRD FOURTH First Second Third Fourth
QUARTER QUARTER QUARTER QUARTER Quarter Quarter Quarter Quarter
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Net sales $800.7 $818.7 $809.2 $846.5 $800.7 $831.4 $852.6 $855.4
Other revenue 10.3 14.2 19.5 25.5 6.0 9.1 9.6 15.8
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OPERATING REVENUE 811.0 832.9 828.7 872.0 806.7 840.5 862.2 871.2
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Cost of products sold 202.7 217.8 214.3 208.3 187.6 195.3 195.2 205.6
Research and development 154.8 148.3 146.7 157.4 142.8 158.1 158.8 152.8
Marketing and administrative 301.5 316.5 302.0 374.8 313.6 324.2 343.2 335.1
Restructuring 208.8
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OPERATING INCOME (LOSS) 152.0 150.3 165.7 131.5 162.7 162.9 (43.8) 177.7
Interest income 13.2 14.1 15.1 17.2 12.2 12.4 13.1 13.1
Interest expense (6.4) (6.3) (6.6) (5.3) (8.7) (9.4) (7.6) (5.8)
Foreign exchange (losses)
gains (1.7) (.4) 1.1 (.1) (1.9) (.3) (2.0) (.4)
All other, net .1 (.7) 10.1 .4 12.2 (2.6) (4.3) .5
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EARNINGS (LOSSES) FROM
CONTINUING OPERATIONS
BEFORE INCOME TAXES AND
MINORITY EQUITY 157.2 157.0 185.4 143.7 176.5 163.0 (44.6) 185.1
Provision for income taxes 35.5 37.0 45.8 36.1 38.2 39.8 (22.6) 28.7
Minority equity in (losses)
earnings (2.2) 1.9 (.3) .4 (.7) (.3) (.4) .9
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EARNINGS (LOSS) FROM
CONTINUING OPERATIONS 123.9 118.1 139.9 107.2 139.0 123.5 (21.6) 155.5
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Earnings (loss) from
discontinued operations
(net of tax) 10.9 2.0 (5.7) (5.5) 13.4 1.8 (8.5) 8.2
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EARNINGS (LOSS) BEFORE
CUMULATIVE EFFECT OF
ACCOUNTING CHANGES 134.8 120.1 134.2 101.7 152.4 125.3 (30.1) 163.7
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Cumulative effect of
accounting changes
(net of tax) (18.9)
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NET EARNINGS (LOSS) 134.8 120.1 134.2 101.7 133.5 125.3 (30.1) 163.7
Dividends on preferred stock
(net of tax) 3.0 3.1 3.0 3.2 3.0 3.1 3.0 3.0
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NET EARNINGS (LOSS) ON
COMMON STOCK $131.8 $117.0 $131.2 $ 98.5 $130.5 $122.2 $(33.1) $160.7
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NET EARNINGS PER COMMON SHARE:
Primary
- Earnings (loss) before
accounting changes $.70 $.66 $.79 $.60 $.78 $.69 $(.14) $.87
- Discontinued operations .06 .01 (.03) (.03) .08 .01 (.05) .05
- Cumulative effect of
accounting changes (.11)
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Primary - Net earnings (loss) $.76 $.67 $.76 $.57 $.75 $.70 $(.19) $.92
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Fully diluted -
Earnings (loss) before
accounting changes $.68 $.64 $.76 $.59 $.75 $.67 $(.14) $.85
- Discontinued operations .06 .01 (.03) (.03) .08 .01 (.05) .04
- Cumulative effect of
accounting changes (.10)
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Fully diluted -
Net earnings (loss) $.74 $.65 $.73 $.56 $.73 $.68 $(.19) $.89
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DIVIDENDS DECLARED PER SHARE $.37 $.37 $.37 $.37 $.37 $.37 $.37 $.37
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MARKET PRICE:
High 303/8 335/8 371/8 351/4 323/4 311/4 295/8 35
Low 261/4 253/4 285/8 293/8 26 273/4 255/8 28
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