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The following is an excerpt from a 10-Q SEC Filing, filed by PFIZER INC on 8/6/2004.
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PFIZER INC - 10-Q - 20040806 - NOTES_TO_FINANCIAL_STATEMENT

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

 

 

11 

 

 

12 

 

20 

Restructuring costs:

 

 

 

 

 

 

 

 

 

Pharmacia

 

134 

 

52 

 

 

277 

 

52 

Other

 

 

 

 

 

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 

 

 

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 

$

$

10 

$

62 

$

53 

$

10 

$

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

 

 

 

 

 

(1)

 

 

 

Net transition asset

 

-- 

 

-- 

 

-- 

 

-- 

 

(1)

 

-- 

 

-- 

 

-- 

Actuarial losses

 

23 

 

28 

 

 

 

14 

 

 

 

Curtailments and settlements-net

 

-- 

 

-- 

 

-- 

 

-- 

 

(18)

 

 

-- 

 

-- 

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

 

 

 

 

 

 

 

 

Net transition asset

 

-- 

 

-- 

 

-- 

 

-- 

 

 

-- 

 

-- 

 

-- 

Actuarial losses

 

49 

 

57 

 

18 

 

15 

 

27 

 

18 

 

12 

 

11 

Curtailments and settlements-net

 

-- 

 

 

-- 

 

 

(19)

 

 

-- 

 

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

 

-- 

 

 

 

 

-- 

 

 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

 

 

83 

 

 

 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

 

 

83 

 

 

 

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.

 

 

-