FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended June 30, 1994
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Transition Period From to
_______________________________________________________
Commission File Number 1-4147
THE UPJOHN COMPANY
(Exact name of registrant as specified in its charter)
Delaware 38-1123360
(State of incorporation) (I. R. S. Employer
Identification No.)
7000 Portage Road, Kalamazoo, Michigan 49001
(Address of principal executive offices)
Registrant's telephone number 616-323-4000
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding twelve months, and (2) has been subject
to such filing requirements for the past 90 days. YES X NO
The number of shares of Common Stock, $1 Par Value, outstanding as of
August 1, 1994
was 173,087,620.
Page 1 of 19 pages
The exhibit index is set forth on page 15.
<PAGE>
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
<TABLE>
THE UPJOHN COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
(All Dollar Amounts in Thousands, Except Per-Share Data)
<CAPTION>
Unaudited
For Three Months For Six Months
Ended June 30, Ended June 30,
1994 1993 1994 1993
-------- -------- ---------- ----------
<S> <C> <C> <C> <C>
Net sales $891,025 $894,629 $1,796,808 $1,806,896
Other revenue 14,785 8,897 24,983 14,839
-------- -------- ---------- ----------
Operating revenue 905,810 903,526 1,821,791 1,821,735
Cost of products sold 256,677 226,227 516,467 474,085
Research & development 156,629 166,006 319,488 316,056
Marketing & administrative 338,861 347,974 663,549 685,226
-------- -------- ---------- ----------
Operating income 153,643 163,319 322,287 346,368
Interest income 14,508 13,092 28,342 25,986
Interest expense (6,253) (9,383) (12,671) (18,107)
Foreign exchange (losses) (434) (326) (2,302) (2,191)
All other, net (744) (2,549) (650) 9,849
-------- -------- ---------- ----------
Earnings from continuing operations
before income taxes & minority equity 160,720 164,153 335,006 361,905
Provision for income taxes 38,600 39,400 80,400 86,700
Minority equity in earnings (losses) 2,035 (336) (232) (1,333)
-------- -------- ---------- ----------
Earnings from continuing operations 120,085 125,089 254,838 276,538
Earnings from discontinued operation 193 1,113
-------- -------- ---------- ----------
Earnings before cumulative effect of
accounting changes 120,085 125,282 254,838 277,651
Cumulative effect of accounting changes
(net of tax) (18,906)
-------- -------- ---------- ----------
Net earnings 120,085 125,282 254,838 258,745
Dividends on preferred stock
(net of tax) 3,089 3,081 6,126 6,122
-------- -------- ---------- ----------
Net earnings on common stock $116,996 $122,201 $ 248,712 $ 252,623
======== ======== ========== ==========
Earnings per common share:
Primary - Earnings from continuing
operations before
accounting changes $.67 $.70 $1.43 $1.55
- Discontinued operation .01
- Cumulative effect of
accounting changes (.11)
---- ---- ----- -----
- Net earnings $.67 $.70 $1.43 $1.45
==== ==== ===== =====
Fully - Earnings from continuing
Diluted operations before
accounting changes $.65 $.68 $1.39 $1.50
- Discontinued operation .01
- Cumulative effect of
accounting changes (.10)
---- ---- ----- -----
- Net earnings $.65 $.68 $1.39 $1.41
==== ==== ===== =====
</TABLE>
See accompanying notes.
<PAGE>
THE UPJOHN COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Six Months Ended June 30
(All Dollar Amounts in Thousands)
Unaudited
1994 1993
-------- --------
Net cash provided by operations $311,471 $361,160
-------- --------
Cash provided (required) by investment activities:
Property, plant and equipment additions (113,920) (143,468)
Proceeds from sale of property, plant and equipment 25,479 3,292
Proceeds from sale of investments 78,304 64,826
Purchase of investments (189,850) (93,322)
Proceeds from sale of discontinued operation 7,943
Other (5,476) (16,676)
-------- --------
Net cash required by investment activities (197,520) (185,348)
-------- --------
Cash provided (required) by financing activities:
Proceeds from issuance of debt 6,367 334,724
Repayment of debt (13,566) (20,793)
Debt maturing in three months or less 3,814 (161,589)
Dividends paid to shareholders (131,839) (133,009)
Purchase of treasury stock (23,021) (27,684)
Other 1,582 5,863
-------- --------
Net cash required by financing activities (156,663) (2,488)
-------- --------
Effect of exchange rate changes on cash 2,167 (4,140)
-------- --------
Net change in cash and cash equivalents (40,545) 169,184
Cash and cash equivalents, beginning of year 291,750 239,513
-------- --------
Cash and cash equivalents, end of period $251,205 $408,697
======== ========
See accompanying notes.
<PAGE>
THE UPJOHN COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(All Dollar Amounts in Thousands)
June 30, December 31,
1994 1993
----------- ------------
(unaudited)
ASSETS
Current assets:
Cash and cash equivalents $ 251,205 $ 291,750
Trade accounts receivable, less allowances
of $64,610 and $52,451 722,754 723,858
Inventories 549,555 570,923
Deferred income taxes 171,014 168,748
Other 233,168 166,487
---------- ----------
Total current assets 1,927,696 1,921,766
---------- ----------
Investments, at cost 677,732 644,431
---------- ----------
Property, plant and equipment, at cost 3,105,411 2,983,276
Less: Allowance for depreciation 1,289,168 1,212,006
---------- ----------
Net property, plant and equipment 1,816,243 1,771,270
---------- ----------
Other noncurrent assets 586,845 548,630
---------- ----------
Total assets $5,008,516 $4,886,097
========== ==========
See accompanying notes.
<PAGE>
THE UPJOHN COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(All Dollar Amounts in Thousands)
June 30, December 31,
1994 1993
----------- ------------
(unaudited)
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Short-term debt, including current
maturities of long-term debt $ 50,196 $ 44,122
Accounts payable 113,074 160,609
Compensation and vacation 89,198 80,204
Dividends payable 64,025 64,170
Income taxes payable 151,153 181,395
Other 545,368 527,465
---------- ----------
Total current liabilities 1,013,014 1,057,965
---------- ----------
Long-term debt 517,933 526,837
---------- ----------
Guarantee of ESOP debt 275,000 275,000
---------- ----------
Postretirement benefit cost 391,574 382,123
---------- ----------
Other liabilities 398,272 407,071
---------- ----------
Deferred income taxes 98,998 94,007
---------- ----------
Minority equity in subsidiaries 63,637 57,444
---------- ----------
Shareholders' equity:
Preferred stock, one dollar par value;
authorized 12,000,000 shares; issued
Series B convertible 7,342 shares
(1993: 7,379 shares) at stated value 295,912 297,387
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 64,720 66,406
Retained earnings 2,655,667 2,535,010
Note receivable from ESOP Trust (ESOT) (31,548) (31,548)
ESOP deferred compensation (247,471) (251,301)
Currency translation adjustments (60,602) (114,198)
Less treasury stock at cost 17,547,409 shares
(1993: 17,157,689 shares) (617,180) (606,696)
---------- ----------
Total shareholders' equity 2,250,088 2,085,650
---------- ----------
Total liabilities and shareholders' equity $5,008,516 $4,886,097
========== ==========
See accompanying notes.
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED
(All Dollar Amounts in Thousands, Except Per-Share Data):
A - INTERIM CONSOLIDATED FINANCIAL STATEMENTS:
The consolidated financial information presented herein is unaudited, other
than the consolidated balance sheet at December 31, 1993, which is derived
from audited financial statements. The interim financial statements and notes
thereto do not include all disclosures required by generally accepted
accounting principles and should be read in conjunction with the financial
statements and notes thereto included in the company's latest annual report on
Form 10-K.
In the opinion of management, the interim financial statements reflect all
adjustments of a normal recurring nature necessary for a fair statement of the
results for interim periods. The current period's results of operations are
not necessarily indicative of results that ultimately may be achieved for the
year.
Reclassification of certain deferred income tax balances has been made on the
balance sheet to conform prior year's data to the current year presentation.
In December 1993, the company divested itself of Asgrow Florida Company.
Where appropriate, these financial statements have been restated to reflect
this divestiture as a discontinued operation.
B - EARNINGS PER COMMON SHARE:
Earnings per share are computed by dividing net earnings available to the
common shareholder by the sum of the weighted average number of shares of
common stock outstanding plus common stock equivalents principally in the form
of employee stock option awards and, in the case of fully diluted earnings per
share, the number of common shares into which the preferred stock would be
assumed to be converted. Also in the fully diluted computation, net earnings
are adjusted by the difference between dividends on preferred and common stock
under the if-converted assumption.
C - INVENTORIES:
June 30, December 31,
1994 1993
-------- ------------
Estimated replacement cost
(FIFO basis):
Pharmaceutical finished products $189,768 $174,615
Seeds 130,732 171,716
Raw materials, supplies and work in process 387,421 375,170
-------- --------
707,921 721,501
Less reduction to LIFO cost (158,366) (150,578)
-------- --------
$549,555 $570,923
======== ========
Inventories valued on the LIFO method had an estimated replacement cost (FIFO
basis) of $451,435 at June 30, 1994, and $461,090 at December 31, 1993.
D - DEBT:
Long-term debt consisted of the following:
June 30, December 31,
1994 1993
-------- ------------
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 17,236 24,083
Current maturities (5,303) (3,246)
-------- --------
$517,933 $526,837
======== ========
The medium-term notes were issued under 1991 and 1993 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
($300,000 under the 1991 registration and $100,000 under the 1993
registration). At June 30, 1994, $34,000 remained available for issuance
under the 1991 registration and $100,000 under the 1993 registration.
E - COMMITMENTS AND CONTINGENT LIABILITIES:
The consolidated balance sheets include accruals for estimated product and
environmental liabilities. The latter includes exposures related to
discontinued operations, including the industrial chemical facility at North
Haven, Connecticut, and environmental exposures at several "Superfund" or
comparable sites. The company believes that existing accruals are adequate
based upon information currently available, although added costs are
reasonably possible (see Note F).
The company has an agreement with the manufacturer of a blood supplement
currently under development. Pursuant to the agreement, investments by the
company could aggregate $179,000 over a period of years, and the company has
committed to pay the expense of clinical development which is currently in
process. As of June 30, 1994, the company has invested $57,500.
F - 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 over 100 cases involving Halcion.
In one of the Halcion suits, plaintiffs are seeking certification as a class
action.
In October 1991, a Cook County, Illinois jury rendered a verdict of $128,000,
including $125,000 in punitive damages, which were subsequently reduced to
$35,000, against the company as a result of an incident involving the use of
the product Depo-Medrol. In June 1994, the Illinois Court of Appeals affirmed
the judgement of the trial court and remanded the matter back to the trial
court with instructions to limit the punitive damage award to approximately
$3,100. The company is reviewing the options for further judicial review of
this matter. The outcome of the litigation is uncertain. The company's
insurance carriers have denied liability for punitive damages, and the company
is in litigation to determine the extent to which the company's insurance
policies cover punitive damages.
The company and certain officers and directors are defendants in a class
action suit pending in the U.S. District Court for the Western District of
Michigan, which is a consolidation of four shareholder suits seeking damages
resulting from the company's alleged misrepresentations and omissions of
information concerning the company's product, HALCION. The plaintiffs claim
that these misrepresentations and omissions of information concerning HALCION
caused the price of the company's stock to be artificially inflated during the
period from January 21, 1989 to January 20, 1992. The company does not
believe that there is merit to the claim and will defend the matter.
The company is also involved in several administrative and judicial
proceedings relating to environmental matters, including actions brought by
the EPA and state environmental agencies for cleanup and/or reimbursement of
costs incurred at approximately 40 "Superfund" or comparable sites. The
company is not able to determine its ultimate exposure in connection with
these environmental situations due to uncertainties related to cleanup
procedures to be employed, if any, the cost of cleanup and the company's share
of a site's cost.
Some portion of the liabilities and expenses associated with the foregoing
product liability and environmental actions may be covered by insurance,
although such matters are currently in litigation.
The company is a party, along with approximately 30 other defendants, in
several civil antitrust lawsuits alleging price discrimination and price-
fixing with respect to the level of discounts and rebates provided to certain
customers.
The company is of the opinion that, although the outcome of the litigation and
proceedings referred to above cannot be predicted with any certainty,
appropriate accruals have been made in the financial statements, and the
ultimate liability should not have a material adverse effect on the company's
consolidated financial position.
Activities continue in connection with remediation of the site of the
company's discontinued industrial chemical operations in North Haven, Conn.
The town is seeking to force the company to remove a sludge pile located on
the plant site because it violates local zoning ordinances. As a result of
the detection of PCBs in the pile in concentrations that may require
compliance with additional laws and regulations relative to disposal of PCBs,
coupled with significant changes in applicable regulations relating to
disposal of hazardous waste, the cost of off-site disposal (if, in fact, such
disposal is possible, legal and ultimately required) could be approximately
$200,000. 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 had 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 has been in the process of evaluating existing environmental
conditions at the North Haven, Conn. facility, including but not limited to
those conditions related to the sludge pile referenced above, for several
years. The U.S. EPA and the company have entered an Administrative Order on
Consent under which the company will complete a Corrective Measures Study and
will implement interim measures appropriate for site stabilization pending
final remedial work as may be necessary. The company believes that it has
established sufficient reserves to cover the costs of any actions required to
be taken after the evaluation process is completed.
G - RESTRUCTURING:
As of September 30, 1993, the company accrued restructuring liabilities that
included estimated costs of $141,875 related to a worldwide workforce
reduction of approximately 1,500 employees, the majority of whom were employed
in marketing, administrative, and manufacturing functions. As of June 30,
1994, approximately 800 employees have terminated under this restructuring
program. Of the amount originally accrued for workforce reduction,
approximately $54,500 remains as current and noncurrent liabilities of the
company. There have been no adjustments made to increase or decrease the
liabilities originally accrued for the purpose of workforce reduction.
H - ACCOUNTING CHANGES:
Effective January 1, 1993, the company's majority-owned subsidiaries that
previously reported financial results on a fiscal year basis ending November
30 changed their reporting period to a calendar year ending December 31. The
results of operations of these subsidiaries for the period December 1 through
December 31, 1992 are included in the June 30, 1993 Consolidated Statement of
Earnings as the cumulative effect of an accounting change that reduced net
earnings by $7,791 ($.04 per share after tax). The cash flows of these
subsidiaries for the seven-month period December 1, 1992 through June 30, 1993
are reflected in the Consolidated Statement of Cash Flows for the period ended
June 30, 1993.
In December 1993, the company adopted Statement of Financial Standards 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, retroactively, as of January 1,
1993. The effect of this change related to years prior to 1993 was $11,115
($.07 per share after tax) and is reported as the cumulative effect of an
accounting change in the June 30, 1993 Consolidated Statement of Earnings.
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations:
RESULTS OF OPERATIONS
The table below provides a year-to-year comparison of second quarter and six
months year-to-date net sales by business segment and major product groups
within each segment:
(Dollars in Millions)
-----------------------------------------------
Second Quarter Six Months
-------------------- -----------------------
Percent Percent
1994 Change 1993 1994 Change 1993
---- ------- ---- ---- ------- ----
Central nervous system
agents $112.4 (40%) $187.6 $ 225.2 (38%) $ 365.6
Steroids, anti-
inflammatory and
analgesic agents 283.3 23 230.6 547.6 20 455.4
Antibiotics 113.8 14 99.4 227.2 9 209.1
Other products and
materials 233.4 (4) 242.6 465.9 3 450.8
------ ------ -------- --------
Total Human Health Care 742.9 (2) 760.2 1,465.9 (1) 1,480.9
------ ------ -------- --------
Animal health 75.8 6 71.2 153.5 2 151.1
Seeds 72.3 14 63.2 177.4 1 174.9
------ ------ -------- --------
Total Agricultural 148.1 10 134.4 330.9 2 326.0
------ ------ -------- --------
Consolidated sales $891.0 - $894.6 $1,796.8 (1) $1,806.9
====== ====== ======== ========
All sales data and financial results for the second quarter and year-to-date
1993 have been restated to reflect the divestiture of Asgrow Florida Company
which was treated as a discontinued operation.
Second-quarter 1994 consolidated domestic sales decreased eight percent to
$498 million from $543 million in the prior year and represented 56 percent of
total consolidated sales as compared to 61 percent one year earlier. Non-U.S.
sales of $393 million were up twelve percent from $352 million in the second
quarter of 1993. Consolidated sales for the second quarter were down slightly
as the result of a one percent decline in volume, a two percent increase in
price, and one percent decrease from foreign exchange. For the year-to-date,
the small decline in consolidated sales was principally the result of a one
percent decrease from foreign exchange. For the second quarter, human health
care sales represented 83 percent of the consolidated total as compared to 85
percent for this period in 1993. For the year-to-date 1994, human health care
sales represented 82 percent of consolidated sales, unchanged from the same
period in 1993.
Human health care sales in the U.S. for the second quarter of 1994 at $420
million were down ten percent from $466 million in the second quarter of 1993
while non-U.S. sales of $323 million in 1994 were up 10 percent from $294
million. Non-U.S. human health care sales in the current quarter represented
43 percent of the worldwide total compared to 39 percent for this period in
1993. For the six months ended June 30, 1994, U.S. sales of human health care
products of $852 million compared to $909 million in 1993, down six percent
while non-U.S. sales of $614 and $572 for these periods respectively, were up
seven percent. Agricultural sales in the U.S. of $78 million in the second
quarter of 1994 were up three percent from $76 million while non-U.S.sales of
$70 million were up 20 percent from $58 million in the second quarter of 1993.
For the year-to-date at June 30, 1994, U.S. agricultural sales of $187 million
were down two percent from $190 million in the prior year while non-U.S. sales
of $144 million were up six percent from $136 million in 1993.
Both the second quarter and six month declines in worldwide sales of central
nervous system agents were the result of intense generic competition for
XANAX, the anti-anxiety agent that lost U.S. patent protection in October
1993. The decline of XANAX was offset somewhat by sales of the company's
generic anti-anxiety agent, alprazolam. HALCION, the sleep-inducing agent,
also lost U.S. patent protection in October 1993 and continues to suffer from
the controversy and adverse publicity of prior years. The company is selling
triazolam, the generic name for HALCION, and began to encounter generic
competition in the second quarter of 1994.
For both the quarter and six months ended June 30, 1994, pharmaceutical sales
growth was led by the steroid, anti-inflammatory and analgesic product group.
This product group includes DEPO-PROVERA, the injectable contraceptive, which
recorded excellent sales growth in both U.S. and non-U.S. markets, and OGEN,
the estrogen replacement therapy which continued to make good contributions to
sales growth. OGEN was acquired at the end of 1993. Also in this product
class, MOTRIN IB, the over-the-counter nonsteroidal analgesic agent continued
its pattern of U.S. sales growth. Sales of SOLU-MEDROL, the injectable
steroidal anti-inflammatory agent, and other MEDROL products were up
moderately in non-U.S. markets. Sales of ANSAID/flurbiprofen, the non-
steroidal anti-inflammatory agents, were up in the U.S. for the quarter due to
initial shipments of the generic version of this product. The patent on
ANSAID expired in February 1993 and until this quarter the company had not
encountered third-party generic competition with this product. Sales of
ANSAID/flurbiprofen are expected to follow the pattern of other company
products facing generic competition and decline sharply over the next few
quarters.
Sales of antibiotic products as a group continued to grow over the prior year
comparative second quarter and six months as the result of the performance of
VANTIN, the broad-spectrum oral antibiotic. Non-U.S. sales of the CLEOCIN
family of products were up for the two comparative periods while U.S. sales of
CLEOCIN-T/clindamycin topical were down due to generic competition.
GLYNASE PresTab, the oral anti-diabetes agent, led sales growth in the other
products and materials category for both the quarter and for the year to date.
ROGAINE sales were down significantly from those of the prior year second
quarter but are off only slightly for the first six months of 1994. Combined
U.S. sales of MICRONASE/glyburide, the oral anti-diabetes agents, were down as
a result of the loss of U.S. market exclusivity. The FDA moratorium on the
approval of Abbreviated New Drug Applications for products containing
glyburide, the generic name for MICRONASE, expired in May 1994 and the company
has begun to sell its generic glyburide to minimize the effect of the third
party generic competition which arose during the quarter. It is anticipated
that sales of MICRONASE will continue to decline for the foreseeable future.
Sales of ATGAM, the immunosuppressant, were flat for the quarter but were up
moderately for the year.
PIRSUE, the product introduced in January 1994 for the treatment of mastitis;
LUTALYSE, the fertility-control agent; and MGA, the feed additive all provided
good growth in the sales of animal health products. Sales of NAXCEL, the
antibiotic, were up slightly for the quarter while sales of companion animal
products were down.
Sales of both vegetable and agronomic seeds were up significantly for the
quarter in non-U.S. markets. Agronomic seeds were up sharply in Europe due to
increased sunflower and soybean sales in France and strong corn sales in
Germany. Vegetable seed sales were strong both in Europe and in the Far East.
U.S. Agronomic sales were up for the quarter due in part to lower provisions
for corn returns but remained down for the year. Current year U.S. agronomic
sales were affected by accelerated shipments to dealers in 1993 which shifted
sales to that year. Many farmers requested early delivery due to perceived
shortages of certain corn varieties. U.S. vegetable seed sales were down for
the quarter but remained up for the year.
Consolidated operating expenses, stated as a percent of sales, were as
follows:
Second Quarter Six Months
-------------- -------------
1994 1993 1994 1993
---- ---- ---- ----
Cost of products sold 28.8% 25.3% 28.7% 26.2%
Research and development 17.6 18.6 17.8 17.5
Marketing and administrative 38.0 38.9 36.9 37.9
Operating income 17.2 18.3 17.9 19.2
The unfavorable comparisons in cost of products sold was caused by a change in
product mix which primarily resulted from the generic competition encountered
with the various human health care products and an overall shift to lower
margin products. Gross margins on agricultural segment products were down
slightly for the quarter due to a greater proportion of lower margin seed
sales when compared to the second quarter of 1993. In the second quarter,
research and development expense was down both in total dollars and as a
percent of sales from the second quarter of 1993 due to the timing of expenses
related to large clinical programs. For the year, research and development is
up both in total dollars and as a percent of sales. Continuing costs
associated with the accelerated development of FREEDOX IV Solution (tirilazad
mesylate) for several indications and other accelerated development efforts
have resulted in spending continuing at the relatively high level encountered
late in 1993. Marketing and administrative expense declined both in dollars
and as a percent of sales in both the second quarter and for the six months
year-to-date due to lower advertising expenditures, ongoing cost control
measures, and implementation of restructuring programs.
Business segment operating profits for the first quarters of 1994 and 1993
were as follows:
<TABLE>
<CAPTION>
(Dollars in Millions)
-----------------------------------------------
Second Quarter Six Months
---------------------- --------------------
Percent Percent
1994 Change 1993 1994 Change 1993
---- ------- ---- ---- ------- ----
<S> <C> <C> <C> <C> <C> <C>
Operating profits:
Human health care $159.0 (8)% $173.2 $312.2 (10)% $346.4
Agricultural 10.9 211 3.6 38.7 5 36.9
Corporate and interest (9.2) (27) (12.6) (15.9) (26) (21.4)
------ ------ ------ ------
Earnings from continuing
operations before income
taxes, minority equity
and accounting changes $160.7 (2) $164.2 $335.0 (7) $361.9
====== ====== ====== ======
</TABLE>
Second quarter combined operating profits for the human health care and
agricultural segments of $170 million, before corporate expense and net
interest, declined four percent from $177 in the second quarter of 1993. For
the six months ended June 30, combined operating profits in 1994 of $351
million compared to $383 million in 1993, a decrease of eight percent. Human
health care operating profits in the first quarter of 1993 included a pre-tax
gain of $13.4 million on the sale of the cough/cold medicine trademark,
ORTHOXICOL. The decline in the human health care segment was also
attributable to the generic competition encountered with XANAX, and to a
lesser extent, other company products. In addition to the company's generic
strategy supporting sales, it also enabled the company to retain a significant
share of the alprazolam market. Sales increases recorded by the company's
generic equivalents and other human health care products did not, however,
replace the profits lost by XANAX, HALCION, and MICRONASE. Second quarter
operating profits were up in the agricultural segment due to the increased
seed sales in non-U.S. markets. For the year-to-date agricultural segment
operating profits were flat as the non-U.S. gains were offset by the
acceleration of U.S. agronomic sales to 1993 as discussed earlier. Corporate
expense and net interest for both the quarter and year-to-date were lower than
the prior year due to a more favorable comparison of interest income to
interest expense, from expense reductions and from first quarter 1994 gains on
the sale of certain corporate fixed assets.
The effective tax rate for the second quarter and first six months of 1994 was
24 percent, unchanged from the equivalent periods in 1993. This rate compares
to the 22 percent rate effective for the full year 1993 (after excluding the
effects of restructuring in that year). The increase in rate is due to a
lesser proportion of total earnings from products produced in Puerto Rico.
The Omnibus Budget Reconciliation Act of 1993 will have a significant impact
on the company's net earnings in years subsequent to 1994 due to the
provisions resulting in a graduated decline in the amount of Puerto Rico tax
benefits under Section 936 of the Internal Revenue Code (ultimately reducing
the benefit under the current law by 60 percent).
Net earnings in the second quarter of 1994 of $120 million are down four
percent from $125 million for the prior year second quarter. For the six
months ended June 30, 1994, net earnings of $255 million compared to $259
million for this period in 1993. The 1993 measure included the cumulative
effect of two accounting changes that reduced net earnings by $19 million.
These charges were partially offset by the gain on the sale of ORTHOXICOL,
referred to above, that was recorded in the first quarter of 1993.
FINANCIAL CONDITION
Working capital increased to $915 million at June 30, 1994, up from $864
million at December 31, 1993, with a corresponding improvement in the current
ratio to 1.90 from 1.82 at those dates, respectively. The ratio of debt to
total capitalization declined to 26.7 percent at June 30, 1994 from 28.3
percent at December 31, 1993. This improvement was realized due to a increase
in total shareholders equity at the end of the current quarter, with no
increase in debt, when compared to that of the prior year-end. The return on
average equity improved to 23.5 percent from 19.1 percent for the full year
1993. The 1993 measure included restructuring and the net of the cumulative
effect of the two accounting changes over the gain on the sale of ORTHOXICOL,
previously discussed. The return on average equity before restructuring,
accounting changes and the gain on the sale of ORTHOXICOL would have been 27.2
percent.
Net cash provided by operations decreased to $311 million for the six months
of 1994 compared to $361 million for this period in 1993. Cash from
operations declined due to approximately $49 million in spending against
restructuring reserves during this six-month period, primarily related to the
reduction of personnel. For the remainder of 1994, cash spending related to
restructuring is expected to be about $40 million. Operating cash was also
utilized to reduce current accounts payable. Cash from operations benefitted
from reduced inventories when compared to those at December 31, 1993.
The greatest source of cash from non-operating activities was the proceeds
received from the sale of certain fixed assets no longer needed in operations.
The non-operating uses of cash included the purchase of property plant and
equipment, the purchase of investments, the purchase of treasury stock and
dividends paid to shareholders.
OTHER ITEMS
All company operations continue to be subject to increased environmental
regulation and legislation, as well as more stringent cleanup requirements and
legal actions (see Note F to the Consolidated Financial Statements).
The company is unable to predict what effect these matters or any pending or
future legislation, regulations, or government actions may have on its
business.
PART II - OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders
Two shareholder proposals were voted on and four directors were
elected by security holders at the company's Annual Meeting of
Shareholders which convened on May 17, 1994:
Shareholder Proposal No. 1 requested the board to create and implement
a policy of price restraint for pharmaceutical products.
Affirmative votes 5,587,678
Negative votes 123,484,698
Shareholder Proposal No. 2 requested the board to form a committee to
formulate an educational plan that would inform women of the possible
abortifacient action of any of the company's products.
Affirmative votes 5,750,986
Negative votes 108,489,436
The following directors were elected at the meeting:
F. C. Carlucci Votes for 154,214,720 98.4%
Votes withheld 2,438,844 1.6%
W. D. Mulholland Votes for 154,417,847 98.6%
Votes withheld 2,235,716 1.4%
R. T. Parfet, Jr. Votes for 154,327,764 98.5%
Votes withheld 2,325,800 1.5%
J. L. Zabriskie Votes for 154,644,008 98.7%
Votes withheld 2,009,556 1.3%
Members of the Board of Directors whose term of office continued after
the meeting include:
Richard H. Brown
M. Kathryn Eickhoff
Daryl F. Grisham
Lawrence C. Hoff
Geraldine Kenney-Wallace
William E. LaMothe
Jerry R. Mitchell
William U. Parfet
Ley S. Smith
Item 6. Exhibits and Reports on Form 8-K.
(a)(i) Exhibit A - Report of Independent Accountants (page 16).
(a)(ii) Exhibit 11 - Statement regarding computation of earnings
per share (page 17).
(a)(iii) Exhibit 12 - Ratio of Earnings to Fixed Charges (page 18).
(a)(iv) Exhibit 15 - Awareness of Coopers & Lybrand (page 19).
(b) There were no reports on Form 8-K during the quarter ended
June 30, 1994.
SIGNATURE:
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
THE UPJOHN COMPANY
(Registrant)
DATE: AUGUST 11, 1994 R. C. Salisbury
Executive Vice President for
Finance and Chief Financial Officer
DATE: AUGUST 11, 1994 D. W. Schmitz
Assistant Secretary
EXHIBIT A
To the Shareholders and
Board of Directors
The Upjohn Company
We have reviewed the condensed consolidated balance sheet of The Upjohn
Company and Subsidiaries as of June 30, 1994, and the related condensed
consolidated statements of earnings and cash flows for the three-month and the
six-months periods ended June 30, 1994 and 1993. These financial statements
are the responsibility of The Upjohn Company's management.
We conducted our review in accordance with standards established by the
American Institute of Certified Public Accountants. A review of interim
financial information consists principally of applying analytical procedures
to financial data and making inquiries of persons responsible for financial
and accounting matters. It is substantially less in scope that an audit
conducted in accordance with generally accepted auditing standards, the
objective of which is the expression of an opinion regarding the financial
statements taken as a whole. Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any material modifications that
should be made to the accompanying condensed consolidated financial statements
referred to above, for them to be in conformity with generally accepted
accounting principles.
We have previously audited, in accordance with generally accepted auditing
standards, the consolidated balance sheet as of December 31, 1993, and the
related consolidated statements of earnings, shareholders' equity, cash flows
and segment operations for the year then ended (not presented herein); and in
our report, dated January 31, 1994, we expressed an unqualified opinion on
those consolidated financial statements. In our opinion, the information set
forth in the accompanying condensed consolidated balance sheet as of December
31, 1993, is fairly stated, in all material respects, in relation to the
consolidated balance sheet from which it has been derived.
COOPERS & LYBRAND L.L.P.
Chicago, Illinois
July 18, 1994
<TABLE>
THE UPJOHN COMPANY AND SUBSIDIARIES EXHIBIT 11
COMPUTATION OF EARNINGS PER COMMON SHARE - PRIMARY
(In millions, except per-share data)
<CAPTION>
Three Months Six Months
Ended June 30, Ended June 30,
1994 1993 1994 1993
------ ------ ------ ------
<S> <C> <C> <C> <C>
Earnings from continuing operations $120.1 $125.1 $254.8 $276.5
Discontinued operation .2 1.1
Cumulative effect of accounting changes (18.9)
------ ------ ------ ------
Net earnings 120.1 125.3 254.8 258.7
Dividends on preferred stock, net of tax 3.1 3.1 6.1 6.1
------ ------ ------ ------
Net earnings on common shares - primary $117.0 $122.2 $248.7 $252.6
====== ====== ====== ======
Average number of common shares outstanding 173.0 174.0 173.2 174.2
Number of common shares issuable assuming
exercise of stock options .1 .2 .1 .1
Contingently issuable incentive common shares .3 .3 .3 .3
------ ------ ------ ------
Total shares - primary 173.4 174.5 173.6 174.6
====== ====== ====== ======
Primary earnings per common share:
Earnings from continuing operations $ .67 $ .70 $ 1.43 $ 1.55
Discontinued operation .01
Cumulative effect of accounting changes (.11)
------ ------ ------ ------
Net earnings $ .67 $ .70 $ 1.43 $ 1.45
====== ====== ====== ======
COMPUTATION OF EARNINGS PER COMMON SHARE - FULLY DILUTED
Earnings from continuing operations $120.1 $125.1 $254.8 $276.5
Discontinued operation .2 1.1
Cumulative effect of accounting changes (18.9)
------ ------ ------ ------
Net earnings 120.1 125.3 254.8 258.7
Less ESOP contribution assumed to be required if
preferred shares are converted into common shares 1.3 1.3 2.5 2.6
------ ------ ------ ------
Net earnings on common shares - fully diluted $118.8 $124.0 $252.3 $256.1
====== ====== ====== ======
Average number of common shares outstanding 173.0 174.0 173.2 174.2
Number of common shares issuable assuming exercise
of stock options .2 .2 .2 .2
Contingently issuable incentive common shares .3 .3 .3 .3
Number of common shares issuable assuming
conversion of preferred shares 7.3 7.4 7.3 7.4
------ ------ ------ ------
Total shares - fully diluted 180.8 181.9 181.0 182.1
====== ====== ====== ======
Fully diluted earnings per common share:
Earnings from continuing operations $ .65 $ .68 $ 1.39 $ 1.50
Discontinued operation .01
Cumulative effect of accounting changes (.10)
------ ------ ------ ------
Net earnings $ .65 $ .68 $ 1.39 $ 1.41
====== ====== ====== ======
</TABLE>
<TABLE> EXHIBIT 12
THE UPJOHN COMPANY AND CONSOLIDATED SUBSIDIARIES
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
(Dollar amounts in thousands)
<CAPTION>
Six Months Year Ended December 31,
Ended ------------------------------------------------
June 30, 1994 1993 1992 1991 1990 1989
------------- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Earnings from continuing
operations before accounting
changes, income taxes and
minority equity $335,006 $490,422 $696,707 $715,553 $651,800 $477,100
Less: Equity in undistributed
net income (loss) of companies
owned less than 50% 2,043 3,119 2,212 1,455 1,742 (1)
-------- -------- -------- -------- -------- --------
332,963 487,303 694,495 714,098 650,058 477,101
Add: Amortization of previously
capitalized interest 2,363 4,009 3,799 3,109 2,922 2,669
Fixed charges included in the
above:
Interest and amortization of
debt expense 26,116 58,381 58,155 46,851 53,502 31,693
Rental expense representative
of an interest factor 6,957 13,914 13,095 10,800 10,940 9,462
-------- -------- -------- -------- -------- --------
Earnings from continuing
operations before accounting
changes, income taxes, minority
equity and fixed charges $368,399 $563,607 $769,544 $774,858 $717,422 $520,925
======== ======== ======== ======== ======== ========
Interest incurred and
amortization of debt expense $ 32,611 $ 74,080 $ 69,163 $ 59,920 $ 61,146 $ 37,919
Rental expense representative
of an interest factor 6,957 13,914 13,095 10,800 10,940 9,462
-------- -------- -------- -------- -------- --------
Total fixed charges $ 39,568 $ 87,994 $ 82,258 $ 70,720 $ 72,086 $ 47,381
======== ======== ======== ======== ======== ========
Ratio of earnings to fixed
charges 9.31 6.41 9.36 10.96 9.95 10.99
==== ==== ==== ===== ==== =====
</TABLE>
EXHIBIT 15
July 18, 1994
Securities and Exchange Commission
500 North Capital Street
Washington, D.C. 20459
RE: The Upjohn Company
Registration on Form 10-Q
We are aware that our report dated July 18, 1994, on our review of interim
financial information of The Upjohn Company and Subsidiaries for the period
ended June 30, 1994, and for the three-month periods ended June 30, 1994 and
1993 included in this Form 10-Q is incorporated by reference in the Company's
prospectus in Form S-3 Registration Statement (No. 33-60304), the prospectus
in Form S-3 Registration Statement (No. 2-88841), the prospectus in Form S-3
Registration Statement (No. 33-42210), the prospectus in Form S-8 Registration
Statement (No. 33-14461), as amended and supplemented and in the Form S-8
Registration Statement (No. 33-15021). Pursuant to Rule 436(c) under the
Securities Act of 1933, this report should not be considered a part of the
registration statement prepared or certified by us within the meaning of
Sections 7 and 11 of the Act.
Very truly yours,
COOPERS & LYBRAND L.L.P.
