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 September 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
November 11, 1994
was 173,320,439.
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 Nine Months
Ended September 30, Ended September 30,
1994 1993 1994 1993
-------- -------- ---------- ----------
<S> <C> <C> <C> <C>
Net sales $838,602 $877,936 $2,635,410 $2,684,832
Other revenue 21,253 10,039 46,236 24,878
-------- -------- ---------- ----------
Operating revenue 859,855 887,975 2,681,646 2,709,710
Cost of products sold 226,625 203,597 743,092 677,682
Research & development 154,650 165,940 474,138 481,996
Marketing & administrative 321,814 362,092 985,363 1,047,318
Restructuring 216,000 216,000
-------- -------- ---------- ----------
Operating income (loss) 156,766 (59,654) 479,053 286,714
Interest income 15,171 14,017 43,513 40,003
Interest expense (6,623) (7,630) (19,294) (25,737)
Foreign exchange gains (losses) 1,051 (2,133) (1,251) (4,324)
All other, net 10,156 (4,442) 9,506 5,407
-------- -------- ---------- ----------
Earnings (loss) from continuing
operations before income taxes
& minority equity 176,521 (59,842) 511,527 302,063
Provision for income taxes 42,400 (28,400) 122,800 58,300
Minority equity in losses (114) (500) (346) (1,833)
-------- -------- ---------- ----------
Earnings (loss) from continuing
operations 134,235 (30,942) 389,073 245,596
Earnings from discontinued operation 872 1,985
-------- -------- ---------- ----------
Earnings (loss) before cumulative effect
of accounting changes 134,235 (30,070) 389,073 247,581
Cumulative effect of accounting changes
(net of tax) (18,906)
-------- -------- ---------- ----------
Net earnings (loss) 134,235 (30,070) 389,073 228,675
Dividends on preferred stock (net of tax) 3,005 2,962 9,131 9,084
-------- -------- ---------- ----------
Net earnings (loss) on common stock $131,230 $(33,032) $ 379,942 $ 219,591
======== ======== ========== ==========
Earnings per common share:
Primary - Earnings (loss) from
continuing operations
before accounting changes $.76 $(.19) $2.19 $1.36
- Discontinued operation .01
- Cumulative effect of
accounting changes (.11)
---- ----- ----- -----
- Net earnings (loss) $.76 $(.19) $2.19 $1.26
==== ===== ===== =====
Fully - Earnings (loss) from
Diluted continuing operations
before accounting changes $.73 $(.19) $2.12 $1.33
- Discontinued operation .01
- Cumulative effect of
accounting changes (.10)
---- ----- ----- -----
- Net earnings (loss) $.73 $(.19) $2.12 $1.24
==== ===== ===== =====
</TABLE>
See accompanying notes.
<PAGE>
THE UPJOHN COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Nine Months Ended September 30
(All Dollar Amounts in Thousands)
Unaudited
1994 1993
-------- --------
Net cash provided by operations $534,983 $546,361
-------- --------
Cash provided (required) by investment activities:
Property, plant and equipment additions (172,298) (221,077)
Proceeds from sale of property, plant and equipment 26,727 5,097
Proceeds from sale of investments 170,869 104,594
Purchase of investments (306,861) (164,472)
Proceeds from sale of discontinued operation 7,943
Other (2,005) (14,411)
-------- --------
Net cash required by investment activities (275,625) (290,269)
-------- --------
Cash provided (required) by financing activities:
Proceeds from issuance of debt 10,430 336,817
Repayment of debt (18,202) (221,347)
Debt maturing in three months or less 5,885 (191,368)
Dividends paid to shareholders (197,718) (199,248)
Purchase of treasury stock (26,017) (42,792)
Other 8,252 6,208
-------- --------
Net cash required by financing activities (217,370) (311,730)
-------- --------
Effect of exchange rate changes on cash 4,531 (2,565)
Net change in cash and cash equivalents 46,519 (58,203)
Cash and cash equivalents, beginning of year 291,750 239,513
-------- --------
Cash and cash equivalents, end of period $338,269 $181,310
======== ========
See accompanying notes.
<PAGE>
THE UPJOHN COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(All Dollar Amounts in Thousands)
September 30, December 31,
1994 1993
------------- ------------
(unaudited)
ASSETS
Current assets:
Cash and cash equivalents $ 338,269 $ 291,750
Trade accounts receivable, less allowances
of $49,743 and $52,451 708,550 723,858
Inventories 576,827 570,923
Deferred income taxes 190,456 168,748
Other 250,465 166,487
---------- ----------
Total current assets 2,064,567 1,921,766
---------- ----------
Investments, at cost 700,451 644,431
---------- ----------
Property, plant and equipment, at cost 3,164,032 2,983,276
Less: Allowance for depreciation 1,326,707 1,212,006
---------- ----------
Net property, plant and equipment 1,837,325 1,771,270
---------- ----------
Other noncurrent assets 567,863 548,630
---------- ----------
Total assets $5,170,206 $4,886,097
========== ==========
See accompanying notes.
<PAGE>
THE UPJOHN COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(All Dollar Amounts in Thousands)
September 30, December 31,
1994 1993
------------- ------------
(unaudited)
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Short-term debt, including current
maturities of long-term debt $ 52,323 $ 44,122
Accounts payable 122,474 160,609
Compensation and vacation 118,223 80,204
Common dividends payable 64,080 64,170
Income taxes payable 189,938 181,395
Other 535,545 527,465
---------- ----------
Total current liabilities 1,082,583 1,057,965
---------- ----------
Long-term debt 516,937 526,837
---------- ----------
Guarantee of ESOP debt 275,000 275,000
---------- ----------
Postretirement benefit cost 393,641 382,123
---------- ----------
Other liabilities 398,040 407,071
---------- ----------
Deferred income taxes 101,840 94,007
---------- ----------
Minority equity in subsidiaries 63,840 57,444
---------- ----------
Shareholders' equity:
Preferred stock, one dollar par value;
authorized 12,000,000 shares; issued
Series B convertible 7,329 shares
(1993: 7,379 shares) at stated value 295,368 297,387
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 64,501 66,406
Retained earnings 2,722,804 2,535,010
Note receivable from ESOP Trust (ESOT) (31,548) (31,548)
ESOP deferred compensation (245,668) (251,301)
Currency translation adjustments (44,866) (114,198)
Less treasury stock at cost 17,401,880
shares (1993: 17,157,689 shares) (612,856) (606,696)
---------- ----------
Total shareholders' equity 2,338,325 2,085,650
---------- ----------
Total liabilities and shareholders' equity $5,170,206 $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:
September 30, December 31,
1994 1993
------------- ------------
Estimated replacement cost
(FIFO basis):
Pharmaceutical finished products $198,546 $174,615
Seeds 153,238 171,716
Raw materials, supplies and work in process 386,526 375,170
-------- --------
738,310 721,501
Less reduction to LIFO cost (161,483) (150,578)
-------- --------
$576,827 $570,923
======== ========
Inventories valued on the LIFO method had an estimated replacement cost (FIFO
basis) of $479,530 at September 30, 1994, and $461,090 at December 31, 1993.
D - DEBT:
Long-term debt consisted of the following:
September 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 17,268 24,083
Current maturities (6,331) (3,246)
-------- --------
$516,937 $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 September 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 September 30, 1994, the company has invested $62,500.
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 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 filed a petition for rehearing with the Court of Appeals
in August 1994. 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 is also involved in several administrative and judicial
proceedings relating to environmental matters, including actions brought by
the U.S. Environmental Protection Agency (U.S. 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 actions may be covered by insurance, although such matters
are currently in litigation.
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 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 U.S. District 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
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, 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,
liquidity, or 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 September
30, 1994, approximately 900 employees have terminated under this restructuring
program. Of the amount originally accrued for workforce reduction,
approximately $47,700 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 September 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 ten-month period December 1, 1992 through September
30, 1993 are reflected in the Consolidated Statement of Cash Flows for the
period ended September 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 September 30, 1993 Consolidated Statement of
Earnings.
I - FINANCIAL INSTRUMENTS:
The company engages in a limited foreign currency hedging program designed to
protect operating results and cash flows from potential adverse effects of
foreign currency fluctuations related to intercompany and selected 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 and purchased currency options with terms
consistent with the underlying exposures. These contracts generally have
maturities that do not exceed twelve months and require the company to
exchange currencies at agreed-upon rates at maturity.
At September 30, 1994, the notional amount of the company's outstanding
foreign currency contracts was $164,000 of which approximately 90 percent
represent forward exchange contracts denominated in European currencies. The
carrying and market values of these instruments are immaterial.
J - SUBSEQUENT EVENT:
On November 7, 1994, the company announced that is has agreed to sell the
Asgrow Seed Company (Asgrow). Asgrow produces and sells agronomic and
vegetable seeds and comprised approximately 45 percent of the Agricultural
segment's net sales for the year 1993 and the nine months ended September 30,
1994. Completion of the sale is subject to regulatory approval and certain
other conditions. Sales proceeds are estimated to be approximately $300,000.
No material gain or loss is anticipated on the sale.
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 third-quarter and nine-
months year-to-date net sales by business segment and major product groups
within each segment:
(Dollars in Millions)
-----------------------------------------------
Third Quarter Nine Months
-------------------- -------------------------
Percent Percent
1994 Change 1993 1994 Change 1993
---- ------- ---- ---- ------- ----
Central nervous system
agents $107.6 (53%) $231.3 $ 332.8 (44%) $ 596.9
Steroids, anti-
inflammatory and
analgesic agents 288.9 24 233.1 836.5 21 688.5
Antibiotics 114.0 21 94.1 341.2 13 303.2
Other products and
materials 208.3 (1) 209.6 674.2 2 660.4
------ ------ -------- --------
Total Human Health Care 718.8 (6) 768.1 2,184.7 (3) 2,249.0
------ ------ -------- --------
Animal health 90.3 7 84.5 243.8 3 235.6
Seeds 29.5 17 25.3 206.9 3 200.2
------ ------ -------- --------
Total Agricultural 119.8 9 109.8 450.7 3 435.8
------ ------ -------- --------
Consolidated sales $838.6 (4) $877.9 $2,635.4 (2) $2,684.8
====== ====== ======== ========
All sales data and financial results for the third quarter and nine-months
year-to-date 1993 have been restated to reflect the December 1993 divestiture
of Asgrow Florida Company which was treated as a discontinued operation.
Third-quarter 1994 consolidated domestic sales decreased 16 percent to $460
million from $547 million in the prior year and represented 55 percent of
total consolidated sales as compared to 62 percent one year earlier. Non-U.S.
sales of $379 million were up 14 percent from $331 million in the third
quarter of 1993. Consolidated sales for the third quarter were down as the
result of a one percent decline in volume, a four percent decline in price,
and a one percent increase from foreign exchange. For the year-to-date, the
decline in consolidated sales was principally the result of one percent
declines in volume and selling price. For the third quarter, human health
care sales represented 86 percent of the consolidated total as compared to 87
percent for this period in 1993. For the year-to-date 1994, human health care
sales represented 83 percent of consolidated sales, down from 84 percent for
the same period in 1993.
Human health care sales in the U.S. for the third quarter of 1994, at $396
million, were down 19 percent from $486 million in the third quarter of 1993,
Non-U.S. sales of $323 million in 1994 were up 14 percent from $282 million in
1993. Non-U.S. human health care sales in the current quarter represented 45
percent of the worldwide total compared to 37 percent for this period in 1993.
For the nine months ended September 30, 1994, U.S. sales of human health care
products of $1,247 million compared to $1,395 million in 1993, down 11
percent, while non-U.S. sales of $938 and $854 for these periods respectively,
were up ten percent.
Agricultural sales in the U.S. of $65 million in the third quarter of 1994
were up six percent from $61 million while non-U.S.sales of $55 million were
up 12 percent from $49 million in the third quarter of 1993. For the year-to-
date at September 30, 1994, U.S. agricultural sales of $252 million were up
less than one percent from the prior year while non-U.S. sales of $199 million
were up eight percent from $184 million in 1993.
Both the third-quarter and nine-month declines in worldwide sales of central
nervous system agents were the result of intense generic competition against
XANAX, the anti-anxiety agent which lost U.S. patent protection in October
1993. The decline in XANAX sales 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.
For both the quarter and nine months ended September 30, 1994, significant
sales growth was realized from the steroid, anti-inflammatory and analgesic
product group. This product group includes DEPO-PROVERA, the injectable
contraceptive, which recorded excellent sales increases in both U.S. and non-
U.S. markets, and OGEN, the estrogen replacement therapy acquired in late
1993, which continues to make good contributions to current year sales. Also
in this product class, MOTRIN IB, the over-the-counter nonsteroidal analgesic
agent, continued to record U.S. sales growth in a very competitive market.
Sales of SOLU-MEDROL, the injectable steroid, and other MEDROL products were
up in non-U.S. markets. Sales of ANSAID/flurbiprofen, the nonsteroidal anti-
inflammatory agents, were up in the U.S. due to a promotional program during
the quarter. ANSAID lost U.S. patent protection in February 1993, and sales
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 respective
prior year three- and nine-month comparative periods largely 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 for the year-to-
date due to generic competition.
In the other products and materials category, sales of ROGAINE, the treatment
for hair loss, were up significantly over those of the prior-year third
quarter which was unusually low due to second-quarter 1993 incentives. For
the first nine months of 1994, sales of ROGAINE demonstrated good growth.
GLYNASE PresTab, the oral anti-diabetes agent, continued to record strong
growth for both the quarter and for the year-to-date. U.S. sales of
MICRONASE/glyburide, the oral anti-diabetes agents, were down for both
comparative periods as a result of the loss of U.S. market exclusivity for
MICRONASE in the second quarter of 1994. While the company will continue to
sell its generic glyburide to minimize the effect of the third party generic
competition, it is anticipated that combined sales of MICRONASE/glyburide will
continue to decline over the next few quarters. Sales of ATGAM, the
immunosuppressant, were down for the quarter but were up moderately for the
year.
In the animal health products market, PIRSUE, introduced in January 1994 for
the treatment of mastitis, and LUTALYSE, the fertility-control agent, provided
sales growth for both the quarter and year-to-date while MGA, the feed
additive, was flat for the year-to-date. Sales of NAXCEL/EXCENEL, the
antibiotic, were up slightly in non-U.S. markets while U.S. sales were down
slightly for the quarter due to a lower cattle population. Sales of companion
animal products were down in both 1994 periods.
Sales of agronomic seeds were up for the quarter in non-U.S. markets due to
wheat seed sales in Spain. Otherwise, this is the off-season for agronomic
seeds worldwide. U.S. Agronomic sales declines for the year were offset by
good growth in non-U.S. markets. U.S. agronomic sales for 1994 were affected
by accelerated shipments to dealers in late 1993 which shifted sales to that
year when many farmers requested early delivery due to perceived shortages of
certain corn varieties. Worldwide vegetable seed sales were up slightly for
the quarter and have recorded good growth for the year.
As discussed in Note J, the company recently entered into an agreement to sell
its worldwide agricultural seed business, Asgrow Seed Company. The business
accounted for approximately 45 percent of the agricultural segment's net sales
in 1993 and the nine months ended September 30, 1994. Proceeds of the sale
are estimated to be approximately $300 million. No material gain or loss is
anticipated.
Consolidated operating expenses, stated as a percent of sales, were as
follows:
Third Quarter Nine Months
-------------- -------------
1994 1993 1994 1993
---- ---- ---- ----
Cost of products sold 27.0% 23.2% 28.2% 25.2%
Research and development 18.4 18.9 18.0 18.0
Marketing and administrative 38.4 41.2 37.4 39.0
Restructuring 24.6 8.0
Operating income (loss) 18.7 (6.8) 18.2 10.7
The unfavorable comparisons in cost of products sold was caused by a change in
product mix which primarily resulted from the generic competition encountered
in the U.S. with certain human health care products and a higher percentage of
worldwide human health care product sales in non-U.S. markets. Cost of
products sold is lower for the quarter than for the nine months ended
September 30, 1994 because the quarter contains significantly less sales of
lower margin seed products. In the third quarter, research and development
expense was down both in total dollars and as a percent of sales from the
third quarter of 1993 due to the timing of expenses related to large clinical
programs. For the year, research and development is down slightly in total
dollars and flat 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
continued spending 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 third quarter and the nine-months year-to-date. The
third quarter 1993 measure included unusual charges totaling $39 million ($24
million or $.14 per share after tax). No unusual charges were recorded in the
same period of 1994. When 1993 is adjusted for those charges, marketing and
administrative expense is down in actual dollars for both the quarter and
nine-month periods. The third quarter of 1993 also included charges totaling
$216 million ($159 million or $.91 per share after tax) related to a plan of
restructuring which reduced operating income substantially for both 1993
periods.
Business segment operating profits for the third quarter and nine months ended
September 30, 1994 and 1993 were as follows:
<TABLE>
<CAPTION>
(Dollars in Millions)
-----------------------------------------------
Third Quarter Nine Months
---------------------- --------------------
Percent Percent
1994 Change 1993 1994 Change 1993
---- ------- ---- ---- ------- ----
<S> <C> <C> <C> <C> <C> <C>
Operating profits:
Human health care $166.4 - $(25.5) $478.5 49% $322.0
Agricultural 15.2 - (6.2) 53.9 68 32.0
Corporate and interest ( 5.1) (82)% (28.1) (20.9) (60) (51.9)
------ ------ ------ ------
Earnings from continuing
operations before income
taxes, minority equity
and accounting changes $176.5 - $(59.8) $511.5 60 $302.1
====== ====== ====== =====
</TABLE>
Third-quarter combined operating profits for the human health care and
agricultural segments of $182 million, before corporate expense and net
interest, compared to operating losses of $32 million in the quarter of 1993.
For the nine months ended September 30, combined operating profits in 1994 of
$532 million compared to $354 million in 1993.
The third-quarter and nine-month 1993 human health care operating profit
measures were reduced by $222 million as the result of restructuring and
unusual items noted above. After excluding the effect of these items, the
declines in operating profit of this segment were attributable to the generic
competition encountered in the U.S. with XANAX, and to a lesser extent, other
company products. Sales contributions from the company's generic equivalents
and other human health care products partially offset the profits lost by
XANAX, HALCION, and MICRONASE.
Operating profits for the third quarter and nine-months year-to-date were up
significantly in the agricultural segment partially due to the effects of the
1993 restructuring which reduced operating profits by $13 million for both the
quarter and nine-month periods of that year. Agricultural segment operating
profits were also up due to increased sales in both measurement periods and
the benefits of expense controls.
The corporate expense and net interest measure for both the quarter and year-
to-date were lower than the prior year partially due to a more favorable
comparison of interest income to interest expense and also due to expense
reduction efforts. Current quarter and year-to-date corporate expense was
also down due to the favorable comparison resulting from the restructuring
which increased this expense measure by $20 million in 1993. The third-
quarter 1994 measure also included nonoperating income of $14 million ($8
million or $.05 per share after tax) associated with the resolution of a
coverage dispute with an insurance carrier and the gain on the sale of a joint
venture. The 1993 year-to-date measure includes a nonoperating gain from the
first quarter of the year of $13 million ($13 million or $.07 after tax) on
the sale of the cough/cold medicine trademark, ORTHOXICOL.
The effective tax rate for the first nine months of 1994 was 24 percent,
compared to 19.5 percent in 1993. Excluding the tax benefits related to the
restructuring charges and other unusual items (including adjustment of
deferred tax amounts due to the new tax law) the effective tax rate for the
first nine months of 1993 also would have been 24 percent.
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 third quarter of 1994 of $134 million are up from a loss
of $30 million for the prior-year third quarter. For the nine months ended
September 30, 1994, net earnings of $389 million compared to $229 million for
this period in 1993. Both 1993 measures include the after tax effect of
restructuring and other unusual items that reduced net earnings by $183
million ($1.05 per share). The cumulative effect of two accounting changes
reduced net earnings for the nine months ended September 30, 1993 by an
additional $19 million ($.11 per share).
FINANCIAL CONDITION
Working capital increased to $982 million at September 30, 1994, up from $864
million at December 31, 1993, with a corresponding improvement in the current
ratio to 1.91 from 1.82 at those dates, respectively. The ratio of debt to
total capitalization declined to 26.0 percent at September 30, 1994 from 28.3
percent at December 31, 1993. This improvement was realized due to an
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 cumulative effect of
accounting changes, previously discussed. The return on average equity before
restructuring and accounting changes would have been 27.2 percent.
Net cash provided by operations decreased to $535 million for the nine months
of 1994 compared to $546 million for this period in 1993. Cash from
operations declined due to approximately $57 million in spending against
restructuring reserves during the current nine-month period, primarily related
to the reduction of personnel. For the remainder of 1994, cash spending
related to restructuring is expected to be about $20 million. Cash from
operations benefitted from reduced accounts receivable when compared to those
at December 31, 1993.
Significant sources of cash from nonoperating activities included the proceeds
received from the sale of certain fixed assets no longer used in operations
and the sale of our investment interest in a joint venture. The nonoperating
uses of cash included the purchase of property, plant and equipment;
investments; treasury stock; and dividends paid to shareholders. The cash
disbursed for both property, plant and equipment and the purchase of treasury
stock was down significantly compared to that of 1993.
OTHER ITEMS
In September 1994, the company presented data to an advisory committee of the
U.S. Food and Drug Administration (FDA) on FREEDOX IV Solution (tirilazad
mesylate injectable) for the treatment of aneurysmal subarachnoid hemorrhage.
The advisory committee tabled consideration of the submission and recommended
that the company continue to work with the FDA and develop additional
information needed for file enhancement for this indication. The advisory
committee's action will have no effect on the company's ongoing clinical
studies of FREEDOX for treatment of head injury, spinal cord injury, and
ischemic stroke.
During the third quarter of 1994, the FDA approved the company's New Drug
Application to market COLESTID Tablets, the cholesterol-lowering medication.
Sales of this new product will begin in the fourth quarter of 1994.
The company has an agreement to jointly market LUVOX, the treatment for
obsessive compulsive disorder, in the U.S. LUVOX is a product of Solvay
Pharmaceuticals, Inc. During the third quarter of 1994, Solvay received an
approvable letter from the FDA for this product.
In September, the company announced that an agreement had been reached to
acquire Sumitomo Chemical Company's interest in Japan Upjohn Limited (JUL)
during the fourth quarter of 1994. Upjohn currently owns 55 percent of the
shares of JUL and with the acquisition of Sumitomo's 45 percent interest, this
will become a wholly owned subsidiary of the company. Cash for this
acquisition will be provided by operations.
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 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).
(a)(v) Exhibit 27 - Financial Data Schedule (EDGAR filing only).
(b) There were no reports on Form 8-K during the quarter ended
September 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: NOVEMBER 11, 1994 R. C. Salisbury,
Executive Vice President for
Finance and Chief Financial Officer
DATE: NOVEMBER 11, 1994 K. M. Cyrus
Executive Vice President, Secretary
and General Counsel
EXHIBIT A
To the Shareholders and
Board of Directors
The Upjohn Company
We have reviewed the consolidated balance sheet of The Upjohn Company and
Subsidiaries as of September 30, 1994, and the related condensed consolidated
statements of earnings and cash flows for the three-month and the nine-month
periods ended September 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 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
October 17, 1994
<TABLE>
THE UPJOHN COMPANY AND SUBSIDIARIES EXHIBIT 11
COMPUTATION OF EARNINGS (LOSS) PER COMMON SHARE - PRIMARY
(In millions, except per-share data)
<CAPTION>
Three Months Nine Months
Ended Sept. 30, Ended Sept. 30,
1994 1993 1994 1993
------ ------ ------ ------
<S> <C> <C> <C> <C>
Earnings (loss) from continuing operations $134.2 $(30.9) $389.1 $245.6
Discontinued operation .8 2.0
Cumulative effect of accounting changes (18.9)
------ ------ ------ ------
Net earnings (loss) 134.2 (30.1) 389.1 228.7
Dividends on preferred stock, net of tax 3.0 2.9 9.1 9.1
------ ------ ------ ------
Net earnings on common shares-primary $131.2 $(33.0) $380.0 $219.6
====== ====== ====== ======
Average number of common shares outstanding 173.1 173.9 173.1 174.1
Number of common shares issuable assuming
exercise of stock options .3 .2 .1
Contingently issuable incentive common shares .3 .3 .3
------ ------ ------ ------
Total shares-primary 173.7 173.9 173.6 174.5
====== ====== ====== ======
Primary earnings (loss) per common share:
Earnings (loss) from continuing operations $ .76 $ (.19) $ 2.19 $ 1.36
Discontinued operation .01
Cumulative effect of accounting changes (.11)
------ ------ ------ ------
Net earnings (loss) $ .76 $ (.19) $ 2.19 $ 1.26
====== ====== ====== ======
COMPUTATION OF EARNINGS (LOSS) PER COMMON SHARE - FULLY DILUTED
Earnings (loss) from continuing operations $134.2 $(33.8)* $389.1 $245.6
Discontinued operation .8 2.0
Cumulative effect of accounting changes (18.9)
------ ------ ------ ------
Net earnings (loss) 134.2 (33.0) 389.1 228.7
Less ESOP contribution assumed to be required if
preferred shares are converted into common shares 1.2 * 3.8 3.7
------ ------ ------ ------
Net earnings (loss) on common shares-fully diluted $133.0 $(33.0) $385.3 $225.0
====== ====== ====== ======
Average number of common shares outstanding 173.1 173.9 173.1 174.1
Number of common shares issuable assuming exercise
of stock options .7 * .7 .1
Contingently issuable incentive common shares .3 * .3 .3
Number of common shares issuable assuming
conversion of preferred shares 7.3 * 7.4 7.4
------ ------ ------ ------
Total shares-fully diluted 181.4 173.9 181.5 181.9
====== ====== ====== ======
Fully diluted earnings (loss) per common share:
Earnings (loss) from continuing operations $ .73 $ (.19) $ 2.12 $ 1.33
Discontinued operation .01
Cumulative effect of accounting changes (.10)
------ ------ ------ ------
Net earnings (loss) $ .73 $ (.19) $ 2.12 $ 1.24
====== ====== ====== ======
*Antidilution rules require inclusion of preferred stock dividend in numerator of the
fully diluted loss per share computation and exclusion of common stock equivalents and
other dilutive shares from the denominator.
</TABLE>
<TABLE> EXHIBIT 12
THE UPJOHN COMPANY AND CONSOLIDATED SUBSIDIARIES
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
(Dollar amounts in thousands)
<CAPTION>
Nine Months Year Ended December 31,
Ended ------------------------------------------------
Sept. 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 $511,527 $490,422 $696,707 $715,553 $651,800 $477,100
Less: Equity in undistributed
net income (loss) of companies
owned less than 50% 2,344 3,119 2,212 1,455 1,742 (1)
-------- -------- -------- -------- -------- --------
509,183 487,303 694,495 714,098 650,058 477,101
Add: Amortization of previously
capitalized interest 3,645 4,009 3,799 3,109 2,922 2,669
Fixed charges included in the
above:
Interest and amortization of
debt expense 39,465 58,381 58,155 46,851 53,502 31,693
Rental expense representative
of an interest factor 10,436 13,914 13,095 10,800 10,940 9,462
-------- -------- -------- -------- -------- --------
Earnings from continuing
operations before accounting
changes, income taxes, minority
equity and fixed charges $562,729 $563,607 $769,544 $774,858 $717,422 $520,925
======== ======== ======== ======== ======== ========
Interest incurred and
amortization of debt expense $ 48,943 $ 74,080 $ 69,163 $ 59,920 $ 61,146 $ 37,919
Rental expense representative
of an interest factor 10,436 13,914 13,095 10,800 10,940 9,462
-------- -------- -------- -------- -------- --------
Total fixed charges $ 59,379 $ 87,994 $ 82,258 $ 70,720 $ 72,086 $ 47,381
======== ======== ======== ======== ======== ========
Ratio of earnings to fixed
charges 9.48 6.41 9.36 10.96 9.95 10.99
==== ==== ==== ===== ==== =====
</TABLE>
EXHIBIT 15
November 11, 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 October 17, 1994, on our review of interim
financial information of The Upjohn Company and Subsidiaries for the period
ended September 30, 1994, and for the three-month periods ended September 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.
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED
FROM THE EARNINGS STATEMENT AND THE BALANCE SHEET AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1994
<PERIOD-END> SEP-30-1994
<CASH> 338269
<SECURITIES> 0
<RECEIVABLES> 758293
<ALLOWANCES> 49743
<INVENTORY> 576827
<CURRENT-ASSETS> 2064567
<PP&E> 3164032
<DEPRECIATION> 1326707
<TOTAL-ASSETS> 5170206
<CURRENT-LIABILITIES> 1082583
<BONDS> 516937<F1>
<COMMON> 190590
0
295368
<OTHER-SE> 1852367
<TOTAL-LIABILITY-AND-EQUITY> 5170206
<SALES> 2635410
<TOTAL-REVENUES> 2681646
<CGS> 743092
<TOTAL-COSTS> 743092
<OTHER-EXPENSES> 474138<F2>
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 19294
<INCOME-PRETAX> 511527
<INCOME-TAX> 122800
<INCOME-CONTINUING> 389073
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 389073
<EPS-PRIMARY> 2.19
<EPS-DILUTED> 2.12
<FN>
<F1>EXCLUDES COMPANY'S GUARANTEE OF ESOP DEBT: $275,000
<F2>ONLY INCLUDES R&D EXPENSE
</FN>
</TABLE>
