PFIZER INC. AND
SUBSIDIARY COMPANIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Note 1: Basis of Presentation
We prepared the condensed consolidated financial statements following
the requirements of the Securities and Exchange Commission (SEC) for interim
reporting. As permitted under those rules, certain footnotes or other financial
information that are normally required by accounting principles generally
accepted in the United States of America (GAAP) can be condensed or omitted.
Balance sheet amounts and operating results for subsidiaries operating outside
the U.S. are as of and for the three-month and six-month periods ended May 23,
2004 and May 25, 2003.
We have made certain reclassifications to the 2003 condensed
consolidated financial statements to conform to the 2004 presentation. These
reclassifications include the results of operations, the assets and liabilities
held for sale and cash flows related to certain businesses and product lines
reported as discontinued operations during the three-month and six-month
periods ended June 27, 2004 - See Note 12, "Discontinued
Operations." Amortization of intangible assets (relating primarily to
intangible assets acquired in connection with the acquisition of Pharmacia)
previously included in
Other
(income)/deductions-net
is now presented in
Amortization of intangible assets.
Copromotion
charges and payments for intellectual property rights previously included in
Other (income)/deductions-net
is now
presented in
Research and development
expenses
.
We are responsible for the unaudited financial statements included in
this document. The financial statements include all normal and recurring
adjustments that are considered necessary for the fair presentation of our
financial position and operating results.
Revenues, expenses, assets and liabilities can vary during each quarter
of the year. Therefore, the results and trends in these interim financial
statements may not be representative of those for the full year.
The information included in this Quarterly Report on Form 10-Q
should be read in conjunction with the consolidated financial statements and
accompanying notes included in Pfizer's Annual Report on Form 10-K for the
year ended December 31, 2003.
On April 16, 2003 we completed our acquisition of Pharmacia
Corporation (Pharmacia) in a stock-for-stock transaction accounted for under
the purchase method of accounting - See Note 3, "Pharmacia
Acquisition." Starting at the date of acquisition, April 16, 2003,
the Pharmacia assets acquired and liabilities assumed were recorded at their
respective fair values and our results of operations include Pharmacia's
product sales and expenses from the acquisition date. Therefore, our operating
results for the second quarter and first six months of 2004 reflect the impact of
the acquisition of Pharmacia throughout each period, as compared to the second
quarter and first six months of 2003 which reflect the impact of the
acquisition of Pharmacia from April 16, 2003.
In accordance with Statement of Financial Accounting Standards (SFAS)
No. 123,
Accounting for Stock-Based
Compensation
, we elected to account for our stock-based compensation
under Accounting Principles Board Opinion (APB) No. 25,
Accounting for Stock Issued to Employees
.
The exercise price of stock options granted equals the market price on the date
of grant. There is no recorded expense related to grants of stock options.
The weighted-average fair
value per stock option granted was $4.49 for the three months ended June 27,
2004, $7.77 for the three months ended June 29, 2003, $6.88 for the six
months ended June 27, 2004 and $7.35 for the six months ended
June 29, 2003. We estimated the fair values, as required under GAAP, using
the Black-Scholes option-pricing model, modified for dividends and using the
assumptions below. In the first quarter of 2004, we changed our method of
estimating expected stock price volatility to reflect market-based inputs under
emerging stock option valuation considerations. The Black-Scholes model is a
trading option-pricing model that neither considers the non-traded nature of
employee stock options, nor considers the restrictions on trading, the lack of
transferability or the ability of employees to forfeit the options prior to
expiry. If the model adequately permitted considerations of the unique
characteristics of employee stock options, the resulting estimate of the fair
value of the stock options could be different.
Three Months
Ended
Six Months Ended
June 27,
2004
June 29,
2003
June 27,
2004
June 29,
2003
Expected dividend yield
2.57%
3.23%
2.90%
3.15%
Risk-free interest rate
2.07%
2.86%
3.32%
2.75%
Expected stock price volatility
20.43%
33.41%
22.15%
33.05%
Expected term until exercise (years)
3.26
5.74
5.75
5.58
The following table
summarizes our results for the three-month and six-month periods ended
June 27, 2004 and June 29, 2003 as if we had recorded compensation
expense for the options grants:
Three Months
Ended
Six Months Ended
(millions of dollars, except per common share data)
June 27,
2004
June 29,
2003
June 27,
2004
June 29,
2003
Net income/(loss)
available to common shareholders used in the calculation of basic
earnings/(loss) per common share:
As reported under GAAP*
$
2,862
$
(3,593)
$
5,193
$
1,071
Compensation expense
(147)
(139)
(273)
(251)
Pro forma
$
2,715
$
(3,732)
$
4,920
$
820
Basic earnings/(loss)
per common share:
As reported under GAAP*
$
.38
$
(.48)
$
.69
$
.16
Compensation expense
(.02)
(.02)
(.04)
(.04)
Pro forma
$
.36
$
(.50)
$
.65
$
.12
Net income/(loss)
available to common shareholders used in the calculation of diluted
earnings/(loss) per common share:
As reported under GAAP*
$
2,862
$
(3,592)
$
5,192
$
1,072
Compensation expense
(147)
(139)
(273)
(251)
Pro forma
$
2,715
$
(3,731)
$
4,919
$
821
Diluted earnings/(loss)
per common share:
As reported under GAAP*
$
.38
$
(.48)
$
.68
$
.16
Compensation expense
(.02)
(.02)
(.04)
(.04)
Pro forma
$
.36
$
(.50)
$
.64
$
.12
*
Includes stock based compensation expense, net of
related tax effects, of $40 million for the six months ended
June 27, 2004 ($10 million for the three months ended June 27,
2004) and $29 million for the six months ended June 29, 2003
($20 million for the three months ended June 29, 2003).
Net income available to common shareholders used in the calculation of
basic earnings per common share represents net income reduced by preferred
stock dividends-net of tax and net income available to common shareholders used
in the calculation of diluted earnings per common share represents net income
reduced by the incremental allocation of shares to the Employee Stock Ownership
Plans (ESOPs) acquired as part of the Pharmacia acquisition.
Note 2: Adoption of New Accounting Standards
On January 1, 2004, we adopted the provisions of FASB
Interpretation No. 46R (FIN 46R),
Consolidation
of Variable Interest Entities.
FIN 46R replaces the same titled
FIN 46 that was issued in January 2003. FIN 46R identifies when
entities must be consolidated
with
the financial statements of a company where the investors in an entity do not
have the characteristics of a controlling financial interest or the entity does
not have sufficient equity at risk for the entity to finance its activities
without additional subordinated financial support. The adoption of FIN 46R did
not have a material impact on our consolidated financial statements.
Note 3: Pharmacia Acquisition
A.
Description of Acquisition
On April 16, 2003, Pfizer acquired Pharmacia for a purchase price
of $55,972 million, which included the issuance of approximately
1.8 billion shares of Pfizer common stock, 180 million options on
Pfizer common stock, six thousand shares of Pfizer Series A convertible
perpetual preferred stock (convertible into approximately 15.5 million
shares of Pfizer common stock) and vested share awards, as well as transaction
costs.
The acquisition has been accounted for as a purchase business
combination. Under the purchase method of accounting, the assets acquired and
liabilities assumed from Pharmacia are recorded at the date of acquisition, at
their respective fair values. The consolidated financial statements and
reported results of operations of Pfizer issued after completion of the
acquisition reflect these values.
B.
Allocation
of Purchase Price
The purchase price allocation,
which is considered final, is based on an estimate of the fair value of assets
acquired and liabilities assumed.
(millions of dollars)
Book value of net
assets acquired
$
8,795
Less: existing
goodwill and other intangible assets
1,559
Tangible book value of
net assets acquired
7,236
Remaining allocation:
Increase inventory to
fair value
2,939
Increase long-term
investments to fair value
40
Decrease property,
plant and equipment to fair value
(317)
Record in-process
research and development charge
5,052
Record identifiable
intangible assets
37,066
Increase long-term debt
to fair value
(370)
Increase benefit plan
liabilities to fair value
(1,471)
Increase other net
assets to fair value
(477)
Restructuring costs
incurred through June 27, 2004
(2,182)
Tax adjustments
(12,947)
Goodwill
21,403
Purchase price
$
55,972
Since our
interim allocation in the fourth quarter of 2003, the significant revisions to our
estimates relate primarily to fixed assets ($756 million decrease),
identifiable intangible assets ($155 million decrease) and tax adjustments
($645 million decrease). In addition, we recorded an additional $604 million
in restructuring charges in the first six months of 2004.
The more
significant revisions to our estimates relating to our initial allocation of
the purchase price in the second quarter of 2003 include inventory
($1,331 million increase), fixed assets ($1,128 million decrease)
identifiable intangible assets ($560 million increase) and tax adjustments
($986 million decrease). In addition, we recorded an additional $1,415 million
in restructuring charges.
All of these
revisions reflect our greater understanding of Pharmacia net assets since the
acquisition date.
Note 4: Esperion Therapeutics, Inc. Acquisition
On February 10, 2004, we completed the acquisition of all of the
outstanding shares of Esperion Therapeutics, Inc. (Esperion), a
biopharmaceutical company, with no approved products, that is focused on the
development of high-density-lipoprotein (HDL) cholesterol-targeted therapies
for the treatment of cardiovascular disease, for $1.3 billion in cash
(including transaction costs). The acquisition has been accounted for as a
purchase business combination. The allocation of the purchase price includes
in-process research and development of $920 million, which was expensed,
and goodwill of $234 million, which has been allocated to our
pharmaceutical segment. Neither of these items is deductible for tax purposes.
Note
5: Merger-Related Costs
We incurred the following
merger-related costs primarily in connection with our acquisition of Pharmacia
which was completed on April 16, 2003:
Three Months
Ended
Six Months Ended
(millions of dollars)
June 27,
2004
June 29,
2003
June 27,
2004
June 29,
2003
Integration costs:
Pharmacia
$
141
$
221
$
242
$
301
Other
9
11
12
20
Restructuring costs:
Pharmacia
134
52
277
52
Other
5
1
5
4
Total merger-related
costs - expensed
$
289
$
285
$
536
$
377
Total merger-related
costs - capitalized
$
--
$
767
$
604
$
767
Integration costs represent external, incremental costs directly
related to an acquisition, including expenditures for consulting and systems
integration when incurred.
In connection with the acquisition of Pharmacia, Pfizer management
approved plans throughout 2003 and during the first six months of 2004 to
restructure the operations of both legacy Pfizer and legacy Pharmacia to
eliminate duplicative facilities and reduce costs. The restructuring of our
operations as a result of our acquisition of Pharmacia is expected to continue
through 2005 and include severance, costs of vacating duplicative facilities, contract
termination and other exit costs. Total merger-related expenditures incurred
during 2003-2005 are expected to be about $6.0 billion, on a pre-tax
basis.
Restructuring Costs Associated with
Legacy Pfizer and Legacy Pharmacia - Expensed
We have recorded
restructuring costs associated with exiting certain activities of legacy Pfizer
and legacy Pharmacia (from April 16, 2004), including severance, costs of vacating
duplicative facilities, contract termination and other costs. These costs have
been recorded as a charge to the results of operations and are included in
Merger-related costs.
The components of
the restructuring costs associated with the acquisition of Pharmacia, which
were expensed, follow:
Provisions
(millions of dollars)
Year
2003
Six Months
Ended
June 27,
2004
Total
Utilization
Through
June 27,
2004
Reserve*
June 27,
2004
Employee termination
costs
$
140
$
149
$
289
$
175
$
114
Asset impairments
21
114
135
135
--
Other
16
14
30
18
12
$
177
$
277
$
454
$
328
$
126
*Included in
Other current
liabilities.
Through June 27, 2004,
Employee
termination costs
represent the approved reduction of the legacy
Pfizer and legacy Pharmacia (from April 16, 2004) work force by 2,570 people,
mainly in corporate, manufacturing, distribution, sales and research. We
notified affected individuals and as of June 27, 2004, 1,890 employees
were terminated.
Asset impairments
primarily
include charges to writedown property, plant and equipment.
Other
primarily includes costs to exit
certain activities of legacy Pfizer and legacy Pharmacia (from April 16,
2004).
Restructuring Costs Associated with
Legacy Pharmacia - Capitalized
We have recorded, through
April 15, 2004, $2,182 million of restructuring costs associated with
employee terminations and exiting certain activities of legacy Pharmacia. These
costs are recognized as liabilities assumed in the purchase business
combination. Accordingly, the restructuring costs incurred in the first year
after the acquisition are considered part of the purchase price of Pharmacia
and have been recorded as an increase to goodwill. These restructuring costs
also include costs associated with relocation. Future restructuring costs
associated with legacy Pharmacia will be charged to the results of operations.
The components of the restructuring costs capitalized as a cost of the acquisition
of Pharmacia follow:
Costs Incurred
(millions of dollars)
Year
2003
Six Months
Ended
June 27,
2004
Total
Utilization
Through
June 27,
2004
Reserve*
June 27,
2004
Employee termination
costs
$
1,289
$
258
$
1,547
$
1,390
$
157
Other
289
346
635
444
191
$
1,578
$
604
$
2,182
$
1,834
$
348
* Included in
Other
current liabilities.
Through June 27, 2004,
Employee
termination costs
represent the approved reduction of the legacy
Pharmacia work force by 12,863 people, mainly in corporate, manufacturing,
distribution, sales and research. We notified affected individuals and as of
June 27, 2004, 11,658 employees were terminated.
Employee termination costs
include accrued
severance benefits and costs associated with change-in-control provisions of
certain Pharmacia employment contracts.
Other
includes costs to exit certain activities of legacy Pharmacia, which in the
second quarter of 2004 reflects an approximate $500 million downward
revision related to estimated exit costs.
Note 6: Inventories
The components of
inventories follow:
(millions of dollars)
June 27,
2004
Dec. 31,
2003
Finished goods
$
2,161
$
2,198
Work-in-process
2,508
2,204
Raw materials and
supplies
1,194
1,297
Total inventories
$
5,863
$
5,699
Note 7: Goodwill and Other Intangible Assets
A.
Goodwill
The changes in the
carrying amount of goodwill for the six months ended June 27, 2004, by
segment, follow:
(millions of dollars)
Pharmaceutical
Consumer
Healthcare
Animal
Health
Other
Total
Balance,
December 31, 2003
$
19,487
$
2,615
$
78
$
85
$
22,265
Pharmacia goodwill
adjustments
816
155
(14)
(1)
956
Other*
74
9
28
(74)
37
Balance, June 27,
2004
$
20,377
$
2,779
$
92
$
10
$
23,258
*Includes additions from acquisitions (primarily Esperion),
reclassifications to
Assets of discontinued
businesses and product lines held for sale
(including those
subsequently sold) and the impact of foreign exchange.
Refer to Note 3B
Pharmacia Acquisition:
Allocation of Purchase Price
for the primary factors impacting the
Pharmacia goodwill adjustments.
B.
Intangibles
The components of
identifiable intangible assets follow:
Gross Carrying
Amount
Accumulated
Amortization
(millions of dollars)
June 27,
2004
Dec. 31,
2003
June 27,
2004
Dec. 31,
2003
Amortized
intangible assets:
Developed technology
rights
$
31,760
$
31,566
$
(4,044)
$
(2,364)
Trademarks
145
107
(89)
(68)
Other
560
583
(150)
(186)
Total amortized intangible
assets
32,465
32,256
(4,283)
(2,618)
Unamortized
identifiable intangible assets:
Brands
5,240
5,305
--
--
Trademarks
234
266
--
--
Other
375
382
--
--
Total unamortized
intangible assets
5,849
5,953
--
--
Total
identifiable intangible assets
$
38,314
$
38,209
$
(4,283)
$
(2,618)
Total amortization expense for finite-lived intangible assets was $847 million
and $591 million for the three months ended June 27, 2004 and
June 29, 2003 and $1,690 million and $609 million for the six months
ended June 27, 2004 and June 29, 2003.
Intangible assets that contribute to our ability to sell,
manufacture, research, market and distribute are included in
Amortization of intangible assets
as they
benefit multiple business functions. Intangible assets that are associated with
a single function are included in
Cost of
sales, Selling, informational and administrative
and
Research and development expenses
, as
appropriate.
The annual amortization expense expected for the fiscal years 2004
through 2009 is expected to be $3,347 million in 2004, $3,345 million in 2005, $3,238 million in
2006, $3,088 million in 2007, $2,573 million in 2008, and
$2,364 million in 2009.
Note 8: Financial Instruments
A.
Long-Term Debt
In February 2004, we
issued:
-
$750 million senior unsecured notes, due
February 2014, which pay interest semi-annually, beginning on August 15,
2004, at a rate of 4.5%; and
-
$700 million senior unsecured notes, due March
2007, which pay interest semi-annually, beginning on September 15, 2004,
at a rate of 2.5%.
The notes were issued under a $5 billion debt shelf registration
statement filed with the SEC in November 2002.
B.
Derivative Financial Instruments and Hedging
Activities
During the first six
months of 2004, we entered into the following incremental or new derivative and
hedging activities:
Foreign
Exchange Risk
These foreign exchange
financial instruments serve to protect net income against the impact of the
translation into U.S. dollars of certain foreign exchange denominated
transactions:
Financial Instrument
Hedge Type
Hedged Item
Notional Amount
(millions of dollars)
Maturity Date
Forward contracts
Cash flow
Euro available-for-sale
investments
$175
Through 2004
In addition, forward
contracts used to offset short-term foreign currency assets and liabilities
were primarily for intercompany transactions in euros, Japanese yen and
Australian dollars for the first six months ended June 27, 2004.
Interest
Rate Risk
These interest rate
derivatives are employed to manage interest rate risk:
Financial Instrument
Hedge Type
Hedged Item
Notional Amount
(millions of dollars)
Maturity Date
Swaps
Fair value
U.S. dollar fixed rate
debt
(1)
$750
2014
Swaps
Fair value
U.S. dollar fixed rate
debt
(1)
700
2007
(1)
Serves to reduce exposure to long-term U.S. dollar
interest rates by effectively converting fixed rates associated with
long-term debt obligations to floating rates.
There was no material ineffectiveness in any hedging relationship
reported in earnings in the first six months of 2004.
Note 9: Benefit Plans
The components of net
periodic benefit cost of the U.S. and international pension plans and the
postretirement plans for the three months ended June 27, 2004 and
June 29, 2003 follow:
Pension Plans
U.S. Qualified
U.S. Supplemental
(non-qualified)
International
Postretirement
Plans
(millions of dollars)
2004
2003
2004
2003
2004
2003
2004
2003
Service cost
$
73
$
62
$
9
$
10
$
62
$
53
$
10
$
9
Interest cost
98
90
14
16
72
56
31
30
Expected return on plan
assets
(143)
(97)
--
--
(70)
(52)
(6)
(4)
Amortization of:
Prior service costs
4
5
1
1
(1)
1
1
3
Net transition asset
--
--
--
--
(1)
--
--
--
Actuarial losses
23
28
9
7
14
9
6
6
Curtailments and
settlements-net
--
--
--
--
(18)
3
--
--
Net periodic benefit
costs
$
55
$
88
$
33
$
34
$
58
$
70
$
42
$
44
The component of net
periodic benefit cost of the U.S. and international pension plans and the
post-retirement plans for the six months ended June 27, 2004 and June 29, 2003
follow:
Pension Plans
U.S. Qualified
U.S. Supplemental
(non-qualified)
International
Postretirement
Plans
(millions of dollars)
2004
2003
2004
2003
2004
2003
2004
2003
Service cost
$
144
$
108
$
17
$
17
$
130
$
94
$
20
$
14
Interest cost
195
157
29
29
143
96
62
45
Expected return on plan
assets
(286)
(172)
--
--
(141)
(93)
(11)
(4)
Amortization of:
Prior service costs
8
9
1
1
4
3
1
6
Net transition asset
--
--
--
--
1
--
--
--
Actuarial losses
49
57
18
15
27
18
12
11
Curtailments and
settlements-net
--
1
--
1
(19)
5
--
1
Net periodic benefit
costs
$
110
$
160
$
65
$
63
$
145
$
123
$
84
$
73
We previously disclosed
in our consolidated financial statements for the year ended December 31,
2003, that we expected to contribute approximately $34 million to our U.S.
qualified pension plans, $87 million to our U.S. supplemental (non-qualified)
pension plans and $136 million to our U.S. postretirement plans in 2004.
The expected contributions to our U.S. qualified pension plans and our U.S.
postretirement plans remain unchanged, while we now expect our contributions to
our U.S. supplemental (non-qualified) pension plans to be $121 million in
2004. International pension and postretirement plans will be funded in
accordance with local regulations.
Note
10: Comprehensive Income
Three Months
Ended
Six Months Ended
(millions of dollars)
June 27,
2004
June 29,
2003
June 27,
2004
June 29,
2003
Net income/(loss)
$
2,863
$
(3,591)
$
5,195
$
1,073
Other comprehensive
income/(expense):
Holding gain/(loss) on
investment securities arising during period-net of tax
35
(119)
183
(145)
Reclassification
adjustment-net of tax
--
5
--
5
Net income/(loss) on
investment securities
35
(114)
183
(140)
Currency translation
adjustment and hedges
(1,624)
740
(238)
1,399
Total other
comprehensive income/(expense)
(1,589)
626
(55)
1,259
Total comprehensive income/(loss)
$
1,274
$
(2,965)
$
5,140
$
2,332
The change in currency
translation adjustment and hedges included in
Accumulated
other comprehensive expense
for the first six months of 2004 was:
(millions of dollars)
2004
Opening balance
$
632
Translation adjustment
and hedges
(238)
Ending balance
$
394
Note 11: Earnings Per Common Share
Basic and diluted
earnings per common share (EPS) were computed using the following common share
data:
Three Months
Ended
Six Months Ended
(millions of dollars)
June 27,
2004
June 29,
2003
June 27,
2004
June 29,
2003
EPS
Numerator - Basic:
Income/(loss) from
continuing operations before cumulative effect of change in accounting
principles
$
2,844
$
(3,674)
$
5,163
$
(1,220)
Less: Preferred stock dividends - net of
tax
1
2
2
2
Income/(loss) available
to common shareholders from continuing operations before cumulative effect of
change in accounting principles
2,843
(3,676)
5,161
(1,222)
Discontinued operations:
Income from operations
of discontinued businesses and product lines-net of tax
17
--
30
38
Gains on sales of
discontinued businesses and product lines-net of tax
2
83
2
2,285
Discontinued
operations-net of tax
19
83
32
2,323
Income/(loss)
available to common shareholders before cumulative effect of change in
accounting principles
2,862
(3,593)
5,193
1,101
Cumulative effect of
change in accounting principles-net of tax
--
--
--
(30)
Net income/(loss)
available to common shareholders
$
2,862
$
(3,593)
$
5,193
$
1,071
EPS
Denominator - Basic:
Weighted average number
of common shares outstanding
7,574.1
7,453.4
7,580.2
6,777.4
EPS
Numerator - Diluted:
Income/(loss) from
continuing operations before cumulative effect of change in accounting
principles
$
2,844
$
(3,674)
$
5,163
$
(1,220)
Less: ESOP contribution - net of tax
1
1
3
1
Income/(loss) available
to common shareholders from continuing operations before cumulative effect of
change in accounting principles
2,843
(3,675)
5,160
(1,221)
Discontinued operations:
Income from operations
of discontinued businesses and product lines-net of tax
17
--
30
38
Gains on sales of
discontinued businesses and product lines-net of tax
2
83
2
2,285
Discontinued
operations-net of tax
19
83
32
2,323
Income/(loss)
available to common shareholders before cumulative effect of change in
accounting principles
2,862
(3,592)
5,192
1,102
Cumulative effect of
change in accounting principles-net of tax
--
--
--
(30)
Net income/(loss)
available to common shareholders
$
2,862
$
(3,592)
$
5,192
$
1,072
EPS
Denominator - Diluted:
Weighted average number
of common shares outstanding
7,574.1
7,453.4
7,580.2
6,777.4
Common share
equivalents--stock options, stock issuable under employee compensation plans
and convertible preferred stock
89.9
--
91.4
--
Weighted average number
of common shares outstanding and common share equivalents
7,664.0
7,453.4
7,671.6
6,777.4
Outstanding stock options, representing 280 million shares of
common stock during the three-month and six-month periods ended June 27,
2004, had exercise prices greater than the average market price of our common
stock. These options were excluded from the computation of diluted EPS for these
periods because their inclusion would have had an antidilutive effect.
As a result of incurring a loss from continuing operations before
cumulative effect of change in accounting principles during the three-month and
six-month periods ended June 29, 2003, stock options, stock issuable under
employee compensation plans and convertible preferred stock representing
equivalents of approximately 687 million shares of common stock outstanding
during the three-month and six-month periods ended June 29, 2003 were
excluded from the computation of diluted EPS for those periods because their
inclusion would have had an antidilutive effect.
Also, in the diluted computation, income from continuing operations and
net income are reduced by the incremental contribution to the ESOPs, which were
acquired as part of the Pharmacia acquisition. This contribution is the
after-tax difference between the income that the ESOPs would have received in
preferred stock dividends and the dividend on the common shares assumed to have
been outstanding.
Note 12: Discontinued Operations
We evaluate our
businesses and product lines on an ongoing basis for strategic fit within our
operations. As a result of our evaluation, in the first three months of 2004,
we decided to sell the following businesses and product lines:
-
In January 2004, we agreed to sell our in-vitro
allergy and autoimmune diagnostics testing (Diagnostics) business, formerly
included in the "Corporate/Other" category of our segment
information, for $575 million in cash. The sale was completed on
April 23, 2004. The Diagnostics business was acquired in April 2003 in
connection with our acquisition of Pharmacia. We recorded $153 million
in revenues from this business in 2003.
-
In March 2004, we
decided to sell our surgical ophthalmic business and in April 2004, we agreed
to sell this business for $450 million in cash. The sale was completed
on June 26, 2004 with the proceeds held in escrow until June 28,
2004 (included in
Prepaid expenses, taxes
and other
at June 27, 2004). The surgical ophthalmic business
was included in our Pharmaceutical segment and became a part of Pfizer in
April 2003 in connection with our acquisition of Pharmacia. We recorded $102
million in revenues from this business in 2003.
-
In March 2004, we decided to sell certain non-core
consumer product lines marketed primarily in Europe by our Consumer
Healthcare segment and in May 2004, we agreed to sell these products for 135
million euro (approximately $163 million) in cash. This transaction closed on
June 28, 2004, which is in the third fiscal quarter of 2004. The
majority of these products are small brands, sold in single markets only and
include certain products that became a part of Pfizer in April 2003 in
connection with our acquisition of Pharmacia. We recorded $103 million
in revenues from these products in 2003.
-
In March 2004, we
decided to sell certain European generic pharmaceutical businesses. The
European generic businesses were included in our Pharmaceutical segment and
became a part of Pfizer in April 2003, in connection with our acquisition of
Pharmacia. We recorded $94 million in revenues from these businesses in
2003.
We have included the results of operations of these businesses and
product lines in discontinued operations for the three-month and six-month
periods ended June 27, 2004. Due to the timing of our acquisition of
Pharmacia in April 2003, the results of operations relating to these businesses
and product lines for the three-month and six-month periods ended June 29,
2003 were included in our consolidated results of operations from the April 16,
2003 acquisition date, except for those relating to certain legacy Pfizer
non-core consumer healthcare products which have been included in discontinued
operations for all periods presented.
The significant assets
and liabilities relating to these businesses and product lines include
intangible assets, goodwill, property, plant and equipment, inventory, accounts
receivable, accrued liabilities and deferred taxes.
In 2003, we sold the
following businesses and product lines:
-
In March 2003, we sold the Adams confectionery
products business, formerly part of our Consumer Healthcare segment, for
$4.2 billion in cash. We recognized a gain on the sale of this business
of $3,091 million ($1,824 million net of tax) in the consolidated
statement of operations for the first six months of 2003.
-
In March 2003, we sold the Schick-Wilkinson Sword
shaving products business, formerly part of our Consumer Healthcare segment,
for $930 million in cash. We recognized a gain on the sale of this
business of $462 million ($262 million net of tax) in the
consolidated statement of operations for the first six months of 2003.
-
In March 2003, we
sold the oral contraceptives Estrostep and Loestrin, formerly part of our
Pharmaceutical segment, for $197 million in cash with a right to receive
up to $47.3 million contingent on Estrostep retaining market exclusivity
until the expiration of its patent. We recognized a gain on the sale of these
two products of $193 million ($116 million net of tax) in the
consolidated statement of operations for the first six months of 2003.
-
In April 2003, we
completed the sale of the hormone replacement therapy femhrt, formerly part
of our Pharmaceutical segment, for $160 million in cash with a right to
receive up to $63.8 million contingent on femhrt retaining market
exclusivity until the expiration of its patent. We recognized a gain on the
sale of this product of $139 million ($83 million net of tax) in the
consolidated statement of operations for the second quarter and first six
months of 2003.
These businesses and product lines are reported as discontinued
operations in the three-month and six-month periods ended June 29, 2003.
The following amounts
have been segregated from continuing operations and reported as discontinued
operations:
Three Months
Ended
Six Months Ended
(millions of dollars)
June 27,
2004
June 29,
2003
June 27,
2004
June 29,
2003
Revenues
$
154
$
253
$
304
$
877
Pre-tax income
$
25
$
--
$
45
$
62
Provision for taxes on
income
8
--
15
24
Income from operations
of discontinued businesses and product lines-net of tax
17
--
30
38
Pre-tax gains on sales
of discontinued businesses and product lines
3
139
3
3,885
Provision for taxes on gains
1
56
1
1,600
Gains on sales of
discontinued businesses and product lines-net of tax
2
83
2
2,285
Discontinued operations-net of tax
$
19
$
83
$
32
$
2,323
Note 13: Segment Information
We operate in the
following three business segments:
Pharmaceutical
-
The Pharmaceutical
segment includes treatments for cardiovascular and metabolic diseases,
central nervous system disorders, arthritis and pain, infectious and
respiratory diseases, urogenital conditions, cancer, eye disease, endocrine
disorders and allergies.
Consumer
Healthcare
-
The Consumer Healthcare
segment includes self medications for oral care, upper respiratory health,
tobacco dependence, gastrointestinal health, skin care, eye care and hair
growth.
Animal
Health
-
The Animal Health
segment includes treatments for diseases in livestock and companion animals.
We operate several other businesses which include the manufacture of
empty soft-gelatin capsules (Capsugel) and contract manufacturing and bulk
pharmaceutical chemicals (Pfizer CentreSource). Due to the size of these
businesses, they are grouped into the "Other" category.
Revenues and
profits/(losses) by segment for the three months ended June 27, 2004 and
June 29, 2003 were as follows:
Pharma-
Consumer
Animal
ceutical
Healthcare
Health
Other
(a)
Consolidated
Revenues
2004
$10,704
$869
$484
$ 217
$12,274
2003
8,602
717
383
198
9,900
Segment profit/(loss)
(b)
2004
$ 4,696
$154
$ 89
$(1,511)
(c) (d)
$ 3,428
2003
3,372
120
56
(6,954)
(c) (e)
(3,406)
Revenues and profits/(losses) by segment for the six months ended
June 27, 2004 and June 29, 2003 were as follows:
Pharma-
Consumer
Animal
ceutical
Healthcare
Health
Other
(a)
Consolidated
Revenues
2004
$21,745
$1,673
$912
$ 432
$24,762
2003
16,148
1,296
652
310
18,406
Segment profit/(loss)
(b)
2004
$10,148
$ 313
$155
$(4,059)
(c) (d)
$ 6,557
2003
6,856
253
91
(7,390)
(c) (e)
(190)
(a)
Includes Capsugel, Pfizer CentreSource and
Corporate/Other.
(b)
Equals income from continuing operations before
provision for taxes on income, minority interests and cumulative effect of
change in accounting principles. For management reporting purposes, certain
costs, including non-cash purchase accounting charges and merger-related
costs, are not included in the results utilized by management to evaluate its
core business.
(c)
Includes interest income/(expense), corporate
expenses, other income/(expense), certain performance-based compensation
expenses not allocated to the operating segments, non-cash purchase
accounting charges and merger-related costs.
(d)
Other
includes non-cash charges associated with purchase accounting for
acquisitions for the three-month and six-month periods ended June 27,
2004 including acquired in-process research and development and incremental
intangible amortization and other of $824 million and $2,546 million
that were attributable to
Pharmaceutical
,
$2 million and $3 million for
Consumer
Healthcare
, $1 million and $21 million for
Animal Health
and $(7) million and
$8 million for
Other
.
(e)
Other
includes non-cash charges associated with purchase accounting for the three-month
and six-month periods ended June 29, 2003 including acquired in-process
research and development, the sale of acquired inventory written up to fair
value and incremental intangible amortization and other of
$5,776 million that were attributable to
Pharmaceutical
, $90 million for
Consumer Healthcare
, $222 million
for
Animal Health
and $18 million
for
Other
.
Revenues for each group
of similar products are as follows:
Three Months
Ended
Six Months Ended
(millions of dollars)
June 27,
2004
June 29,
2003
% Change
June 27,
2004
June 29,
2003
% Change
PHARMACEUTICAL
Cardiovascular and metabolic diseases
$
3,963
$
3,568
11
$
8,217
$
7,096
16
Central nervous system disorders
2,036
1,579
29
3,983
3,189
25
Arthritis and pain
1,146
648
77
2,322
737
215
Infectious and respiratory diseases
1,125
902
25
2,360
1,989
19
Urology
583
525
11
1,218
999
22
Oncology
305
200
53
548
200
175
Ophthalmology
291
110
164
570
110
417
Endocrine disorders
223
108
106
443
108
309
All other
894
776
15
1,801
1,203
50
Alliance revenue
138
186
(26)
283
517
(45)
Total Pharmaceutical
10,704
8,602
24
21,745
16,148
35
CONSUMER
HEALTHCARE
869
717
21
1,673
1,296
29
ANIMAL
HEALTH
484
383
26
912
652
40
OTHER
217
198
10
432
310
39
Total revenues
$
12,274
$
9,900
24
$
24,762
$
18,406
35
REVIEW REPORT OF
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Shareholders and Board of Directors of Pfizer Inc.:
We have reviewed the condensed consolidated balance sheet of Pfizer
Inc. and Subsidiary Companies as of June 27, 2004 and the related
condensed consolidated statements of operations for the three-month and
six-month periods ended June 27, 2004 and June 29, 2003 and cash
flows for the six-month periods then ended. These condensed consolidated
financial statements are the responsibility of the Company's management.
We conducted our review in accordance with standards established by the
Public Company Accounting Oversight Board (United States). 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 than an audit conducted in
accordance with the standards of the Public Company Accounting Oversight Board
(United States), 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 condensed consolidated financial statements referred
to above for them to be in conformity with U.S. generally accepted accounting
principles.
We have previously audited, in accordance with auditing standards established
by the Public Company Accounting Oversight Board (United States), the
consolidated balance sheet of Pfizer Inc. and Subsidiary Companies as of
December 31, 2003, and the related consolidated statements of operations,
shareholders' equity and cash flows for the year then ended (not presented
herein); and in our report dated February 26, 2004, 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, 2003, is fairly stated, in all material
respects, in relation to the consolidated balance sheet from which it has been
derived.
Next Section
Previous Section