Pfizer Form 10-Q Third Quarter 2003




UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q

   X     QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 28, 2003

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 1-3619

----

PFIZER INC.
(Exact name of registrant as specified in its charter)

 

DELAWARE
(State of Incorporation)

13-5315170
(I.R.S. Employer Identification No.)

235 East 42nd Street, New York, New York  10017
(212) 573-2323
(Registrant's telephone number)

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 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days.

YES    X            NO     

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).

YES    X            NO     

At November 10, 2003, 7,631,522,869 shares of the issuer's common stock were outstanding (voting).

 

 

 

 

 

 

 

 

 

FORM 10-Q

For the Quarter Ended
September 28, 2003

Table of Contents

 

PART I.  FINANCIAL INFORMATION

Page

 

 

Item 1.

 

 

 

Financial Statements:

 

 

 

Condensed Consolidated Statement of Income for the three months and nine months ended September 28, 2003 and September 29, 2002

3

 

 

Condensed Consolidated Balance Sheet at September 28, 2003 and December 31, 2002

4

 

 

Condensed Consolidated Statement of Cash Flows for the nine months ended September 28, 2003 and September 29, 2002

5

 

 

Notes to Condensed Consolidated Financial Statements

6

 

 

Independent Accountants' Review Report

23

 

 

Item 2.

 

 

 

Management's Discussion and Analysis of Financial Condition and Results of Operations

24

 

 

Item 4.

 

 

 

Disclosure Controls and Procedures

48

 

 

PART II.  OTHER INFORMATION

 

 

 

Item 1.

 

 

 

Legal Proceedings

49

 

 

Item 6.

 

 

 

Exhibits and Reports on Form 8-K

51

 

 

Signature

52

 

 

Certifications

55

PART I.  FINANCIAL INFORMATION

Item 1. Financial Statements

PFIZER INC. AND SUBSIDIARY COMPANIES
CONDENSED CONSOLIDATED STATEMENT OF INCOME
(UNAUDITED)

 

 

Three Months Ended

 

 

Nine Months Ended

(millions of dollars, except per common share data)

 

Sept. 28, 
2003 

 

Sept. 29, 
2002 

 

 

Sept. 28, 
2003 

 

Sept. 29, 
2002 

 

 

 

 

 

 

 

 

 

 

Revenues 

$

12,504 

$

7,996 

 

$

31,022 

$

23,039 

 

 

 

 

 

 

 

 

 

 

Costs and expenses:

 

 

 

 

 

 

 

 

 

Cost of sales       

 

3,366 

 

1,026 

 

 

6,459 

 

2,867 

Selling, informational and administrative expenses             

 

4,043 

 

2,657 

 

 

10,560 

 

7,864 

Research and development expenses   

 

1,879 

 

1,245 

 

 

4,813 

 

3,665 

Merger-related in-process research and development charge               

 

(87)

 

-- 

 

 

5,043 

 

-- 

Merger-related costs           

 

303 

 

114 

 

 

680 

 

387 

Other (income)/deductions-net           

 

506 

 

54 

 

 

1,155 

 

(77)

 

 

 

 

 

 

 

 

 

 

Income from continuing operations before provision for taxes on income, minority interests and cumulative effect of change in accounting principles           

 

2,494 

 

2,900 

 

 

2,312 

 

8,333 

 

 

 

 

 

 

 

 

 

 

Provision for taxes on income

 

253 

 

630 

 

 

1,286 

 

1,859 

 

 

 

 

 

 

 

 

 

 

Minority interests   

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Income from continuing operations before cumulative effect of change in accounting principles          

 

2,239 

 

2,269 

 

 

1,025 

 

6,473 

 

 

 

 

 

 

 

 

 

 

Discontinued operations:

 

 

 

 

 

 

 

 

 

Income/(loss) from operations of discontinued businesses/product lines-net of tax 

 

(4)

 

81 

 

 

28 

 

207 

Gains on sales of discontinued businesses/product lines-net of tax        

 

-- 

 

-- 

 

 

2,285 

 

-- 

 

 

 

 

 

 

 

 

 

 

Discontinued operations-net of tax         

 

(4)

 

81 

 

 

2,313 

 

207 

 

 

 

 

 

 

 

 

 

 

Income before cumulative effect of change in accounting principles       

 

2,235 

 

2,350 

 

 

3,338 

 

6,680 

 

 

 

 

 

 

 

 

 

 

Cumulative effect of change in accounting principles-net of tax             

 

-- 

 

-- 

 

 

(30)

 

(410)

 

 

 

 

 

 

 

 

 

 

Net income             

$

2,235 

$

2,350 

 

$

3,308 

$

6,270 

 

 

 

 

 

 

 

 

 

 

Earnings per common share - Basic:

 

 

 

 

 

 

 

 

 

Income from continuing operations before cumulative effect of change in accounting principles     

$

.29 

$

.38 

 

$

.14 

$

1.06 

Discontinued operations:

 

 

 

 

 

 

 

 

 

Income/(loss) from operations of discontinued businesses/product lines-net of tax             

 

-- 

 

.01 

 

 

-- 

 

.03 

Gains on sales of discontinued businesses/product lines-net of tax   

 

-- 

 

-- 

 

 

.33 

 

-- 

Discontinued operations-net of tax     

 

-- 

 

.01 

 

 

.33 

 

.03 

Income before cumulative effect of change in accounting principles   

 

.29 

 

.39 

 

 

.47 

 

1.09 

Cumulative effect of change in accounting principles-net of tax         

 

-- 

 

-- 

 

 

-- 

 

(.07)

Net income         

$

.29 

$

.39 

 

$

.47 

$

1.02 

 

 

 

 

 

 

 

 

 

 

Earnings per common share - Diluted:

 

 

 

 

 

 

 

 

 

Income from continuing operations before cumulative effect of change in accounting principles     

$

.29 

$

.37 

 

$

.14 

$

1.04 

Discontinued operations:

 

 

 

 

 

 

 

 

 

Income/(loss) from operations of discontinued businesses/product lines-net of tax             

 

-- 

 

.01 

 

 

-- 

 

.03 

Gains on sales of discontinued businesses/product lines-net of tax   

 

-- 

 

-- 

 

 

.32 

 

-- 

Discontinued operations-net of tax     

 

-- 

 

.01 

 

 

.32 

 

.03 

Income before cumulative effect of change in accounting principles   

 

.29 

 

.38 

 

 

.46 

 

1.07 

Cumulative effect of change in accounting principles-net of tax         

 

-- 

 

-- 

 

 

-- 

 

(.07)

Net income         

$

.29 

$

.38 

 

$

.46 

$

1.00 

 

 

 

 

 

 

 

 

 

 

Weighted average shares used to calculate earnings per common share:

 

 

 

 

 

 

 

 

 

Basic   

 

7,710.7 

 

6,126.3

 

 

7,088.5 

 

6,172.3

 

 

 

 

 

 

 

 

 

 

Diluted

 

7,791.2 

 

6,202.2

 

 

7,160.7 

 

6,262.2 

 

 

 

 

 

 

 

 

 

 

Cash dividends paid per common share

$

.15 

$

.13 

 

$

.45 

$

.39 

See accompanying Notes to Condensed Consolidated Financial Statements.

PFIZER INC. AND SUBISIDARY COMPANIES
CONDENSED CONSOLIDATED BALANCE SHEET
(UNAUDITED)

(in millions)

 

Sept. 28, 
2003*

 

Dec. 31, 
2002
**

ASSETS

 

 

 

 

Current Assets

 

 

 

 

Cash and cash equivalents           

$

1,610 

$

1,878 

Short-term investments 

 

12,807 

 

10,673 

Accounts receivable, less allowance for doubtful accounts: $190 and $122        

 

8,626 

 

5,785 

Short-term loans             

 

340 

 

399 

Inventories

 

 

 

 

Finished goods          

 

2,035 

 

1,133 

Work in process         

 

3,318 

 

1,142 

Raw materials and supplies      

 

1,348 

 

403 

Total inventories   

 

6,701 

 

2,678 

Prepaid expenses and taxes          

 

2,983 

 

1,797 

Assets of discontinued businesses held for sale     

 

-- 

 

1,571 

Total current assets              

 

33,067 

 

24,781 

Long-term loans and investments    

 

5,962 

 

5,161 

Property, plant and equipment, less accumulated depreciation: $6,377 and $5,431 

 

17,961 

 

10,712 

Goodwill               

 

22,972 

 

1,200 

Identifiable intangible assets, net    

 

34,179 

 

921 

Other assets, deferred taxes and deferred charges        

 

5,917 

 

3,581 

Total assets            

$

120,058 

$

46,356 

 

 

 

 

 

LIABILITIES AND SHAREHOLDERS' EQUITY

 

 

 

 

Current Liabilities

 

 

 

 

Short-term borrowings, including current portion of long-term debt: $115 and $256          

$

9,396 

$

8,669 

Accounts payable          

 

1,998 

 

1,620 

Income taxes payable     

 

3,678 

 

2,231 

Accrued compensation and related items  

 

1,539 

 

1,084 

Other current liabilities  

 

5,049 

 

4,374 

Liabilities of discontinued businesses held for sale 

 

-- 

 

577 

Total current liabilities          

 

21,660 

 

18,555 

Long-term debt    

 

6,439 

 

3,140 

Pension benefit obligations              

 

2,634 

 

910 

Postretirement benefit obligations other than pension plans      

 

1,417 

 

623 

Deferred taxes on income  

 

14,880 

 

364 

Other noncurrent liabilities

 

4,497 

 

2,814 

Total liabilities        

 

51,527 

 

26,406 

 

 

 

 

 

Shareholders' Equity

 

 

 

 

Preferred stock

 

229 

 

-- 

Common stock

 

434 

 

341 

Additional paid-in capital              

 

65,918 

 

9,368 

Retained earnings           

 

31,191 

 

30,243 

Accumulated other comprehensive expense             

 

(1,434)

 

(1,875)

Employee benefit trust   

 

(1,626)

 

(1,786)

Treasury stock, at cost  

 

(26,181)

 

(16,341)

 

 

 

 

 

Total shareholders' equity   

 

68,531 

 

19,950 

Total liabilities and shareholders' equity           

$

120,058 

$

46,356 

*    Unaudited.

**  Condensed from audited financial statements.

See accompanying Notes to Condensed Financial Statements.

PFIZER INC. AND SUBSIDIARY COMPANIES
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(UNAUDITED)

 

 

Nine Months Ended

(in millions)

 

Sept. 28, 
 2003 

 

Sept. 29, 
2002 

 

 

 

 

 

Operating Activities:

 

 

 

 

Net income             

$

3,308 

$

6,270 

Adjustments to reconcile net income to net cash provided by continuing operating activities:

 

 

 

 

Cumulative effect of change in accounting principles          

 

30 

 

410 

Income from operations of discontinued businesses             

 

(28)

 

(207)

Depreciation and amortization           

 

2,327 

 

736 

Merger-related in-process research and development charge               

 

5,043 

 

-- 

Charge for fair value mark-up of acquired inventory           

 

1,712 

 

-- 

Charges to write-down equity investments          

 

 

28 

Gains on sales of discontinued businesses and product lines, net of tax 

 

(2,285)

 

-- 

Gains on sales of products   

 

(87)

 

(20)

Other  

 

(311)

 

(17)

Changes in assets and liabilities (net of business acquired)    

 

(2,388)

 

(939)

 

 

 

 

 

Net cash provided by continuing operating activities               

 

7,329 

 

6,261 

 

 

 

 

 

Investing Activities:

 

 

 

 

Purchases of property, plant and equipment       

 

(1,862)

 

(1,172)

Purchases of short-term investments  

 

(10,455)

 

(12,133)

Proceeds from redemptions of short-term investments       

 

10,029 

 

9,124 

Purchases of long-term investments   

 

(1,240)

 

(2,533)

Proceeds from redemptions of long-term investments        

 

351 

 

2,907 

Purchases of other assets    

 

(425)

 

(101)

Proceeds from sales of other assets     

 

226 

 

180 

Proceeds from the sales of businesses and product lines       

 

5,600 

 

Cash and cash equivalents acquired through acquisition of Pharmacia  

 

1,789 

 

-- 

Other investment activities

 

(74)

 

20 

 

 

 

 

 

Net cash provided by/(used in) investing activities   

 

3,939 

 

(3,702)

 

 

 

 

 

Financing Activities:

 

 

 

 

Increase in short-term borrowings-net

 

814 

 

4,657 

Principal payments on short-term borrowings-net              

 

(280)

 

(442)

Proceeds from issuances of long-term debt          

 

600 

 

600 

Principal payments on long-term debt

 

(436)

 

(212)

Proceeds from common stock issuances              

 

73 

 

53 

Purchases of common stock               

 

(9,873)

 

(4,726)

Cash dividends paid             

 

(3,276)

 

(2,382)

Stock option transactions and other   

 

854 

 

496 

 

 

 

 

 

Net cash used in financing activities        

 

(11,524)

 

(1,956)

Net cash provided by discontinued operations         

 

14 

 

139 

Effect of exchange-rate changes on cash and cash equivalents 

 

(26)

 

(4)

Net increase/(decrease) in cash and cash equivalents

 

(268)

 

738 

Cash and cash equivalents at beginning of period     

 

1,878 

 

1,036 

 

 

 

 

 

Cash and cash equivalents at end of period              

$

1,610 

$

1,774 

 

 

 

 

 

Supplemental Cash Flow Information:

 

 

 

 

Cash paid during the period for:

 

 

 

 

Income taxes 

$

2,108 

$

1,089 

Interest          

 

235 

 

208 

Non-cash transactions:

 

 

 

 

Issuance of common stock, preferred stock and stock options related to acquisition of Pharmacia, net of transaction costs        

$

55,872

$

-- 

See accompanying Notes to Condensed Financial Statements.

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 nine-month periods ended August 24, 2003 and August 25, 2002. We made certain reclassifications to the 2002 condensed consolidated financial statements to conform to the 2003 presentation.

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.

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 2, "Pharmacia Acquisition". Commencing with the date of acquisition, April 16, 2003, the Pharmacia assets acquired and liabilities assumed, as well as the results of Pharmacia's operations are included in our condensed consolidated financial statements. About 4 1/2 months of results of operations of Pharmacia's international operations and about 5 1/2 months of results of operations of Pharmacia's U.S. operations are included in our condensed consolidated financial statements for the nine-month period ended September 28, 2003.

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 as those for the full year.

The information included in this Quarterly Report on Form 10-Q should be read in conjunction with:

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 $8.46 for the three months ended September 28, 2003, $8.78 for the three months ended September 29, 2002, $7.35 for the nine months ended September 28, 2003 and $12.58 for the nine months ended September 29, 2002. We estimated the fair values, as required under GAAP, using the Black-Scholes option-pricing model, modified for dividends and using the assumptions below. The Black-Scholes model is a trading option-pricing model that neither considers the non-traded nature of employee stock options, nor 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

 

Nine Months Ended

 

Sept. 28,
2003

Sept. 29,
2002

 

Sept. 28,
2003

 

Sept. 29,
2002

 

 

 

 

 

 

 

Expected dividend yield

2.81%

2.71%

 

3.15%

 

1.90%

Risk-free interest rate

3.27%

3.86%

 

2.75%

 

4.35%

Expected stock price volatility

33.08%

32.93%

 

33.05%

 

32.41%

Expected term until exercise (years)

5.46   

5.50   

 

5.58   

 

5.30   

 

The following table summarizes our results for the three months and nine months ended September 28, 2003 and September 29, 2002 as if we had recorded compensation expense for the options grants:

 

 

Three Months Ended

 

 

Nine Months Ended

(millions of dollars, except per common share data)

 

Sept. 28, 
2003 

 

Sept. 29, 
2002 

 

 

Sept. 28, 
2003 

 

Sept. 29, 
2002 

 

 

 

 

 

 

 

 

 

 

Net income available to common shareholders used in the calculation of basic earnings per common share:

 

 

 

 

 

 

 

 

 

As reported under GAAP*

$

2,234 

$

2,350 

 

$

3,306 

$

6,270 

Compensation expense

 

(143)

 

(160)

 

 

(394)

 

(380)

Pro forma

$

2,091 

$

2,190 

 

$

2,912 

$

5,890 

 

 

 

 

 

 

 

 

 

 

Basic earnings per common share:

 

 

 

 

 

 

 

 

 

As reported under GAAP*

$

.29 

$

.39 

 

$

.47 

$

1.02 

Compensation expense

 

(.02)

 

(.03)

 

 

(.06)

 

(.07)

Pro forma

$

.27 

$

.36 

 

$

.41 

$

.95 

 

 

 

 

 

 

 

 

 

 

Net income available to common shareholders used in the calculation of diluted earnings per common share:

 

 

 

 

 

 

 

 

 

As reported under GAAP*

$

2,234 

$

2,350 

 

$

3,306 

$

6,270 

Compensation expense

 

(143)

 

(160)

 

 

(394)

 

(380)

Pro forma

$

2,091 

$

2,190 

 

$

2,912 

$

5,890 

 

 

 

 

 

 

 

 

 

 

Diluted earnings per common share:

 

 

 

 

 

 

 

 

 

As reported under GAAP*

$

.29 

$

.38 

 

$

.46 

$

1.00 

Compensation expense

 

(.02)

 

(.03)

 

 

(.05)

 

(.06)

Pro forma

$

.27 

$

.35 

 

$

.41 

$

.94 

 

 

 

 

 

 

 

 

 

 

*

Includes stock based compensation expense, net of related tax effects, of $28 million for the nine months ended September 28, 2003 ($1 million income for the three months ended September 28, 2003) and $10 million for the nine months ended September 29, 2002 ($6 million income for the three months ended September 29, 2002).

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. Net income available to common shareholders used in the calculation of diluted earnings per common share represents net income reduced by the incremental contribution to the Employee Stock Ownership Plan (ESOP), acquired as part of the Pharmacia acquisition.

Note 2:  Pharmacia Acquisition

On April 16, 2003, Pfizer acquired Pharmacia for a purchase price of approximately $56 billion, which includes Pfizer common stock valued at $54.2 billion, options on Pfizer common stock valued at $1.1 billion, Pfizer convertible perpetual preferred stock valued at $.5 billion, and vested share awards valued at $.1 billion, as well as transaction costs of $90 million.

The fair value of Pfizer common stock was derived using an average market price per share of Pfizer common stock of $29.81, which was based on Pfizer's average stock price for the period two days before through two days after the terms of the acquisition were agreed to and announced on July 15, 2002.

Under the terms of the merger agreement, each outstanding share of Pharmacia common stock was exchanged for 1.4 shares of Pfizer common stock in a tax-free transaction. Each share of Pharmacia Series C convertible perpetual preferred stock was exchanged for a newly created class of Pfizer Series A convertible perpetual preferred stock with rights substantially similar to the rights of the Pharmacia Series C convertible perpetual preferred stock.

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 will reflect these values, but will not be restated retroactively to reflect the historical financial position or results of operations of Pharmacia.

The following is an estimate of the purchase price for Pharmacia, as of April 16, 2003:

Common Stock

 

 

 

 

 

Number of shares of Pharmacia common stock outstanding as of April 16, 2003 (in thousands)

 

1,298,157

 

 

 

Exchange ratio

 

1.4

 

 

 

 

 

1,817,420

 

 

 

Multiplied by Pfizer's average stock price for the period two days before through two days after the July 15, 2002 announcement of the merger agreement

$

29.81

 

$

54,177 million

 

 

 

 

 

 

Preferred Stock

 

 

 

 

 

Number of shares of Pharmacia Series B perpetual  preferred stock to be exchanged for substantially similar Pharmacia Series C perpetual preferred stock, outstanding and convertible into common stock as of April 16, 2003

 

6,028.931

 

 

 

Conversion feature

 

1,839.19

 

 

 

Number of shares of Pharmacia common stock issuable upon conversion (in thousands)

 

11,088,350

 

 

 

Exchange ratio

 

1.4

 

 

 

 

 

15,523,690

 

 

 

Multiplied by Pfizer's average stock price for the period two days before through two days after the July 15, 2002 announcement of the merger agreement

$

29.81

 

 

463 million

 

 

 

 

 

 

Stock Options

 

 

 

 

 

Estimated fair value of 180,068 Pfizer stock options (in thousands) issued as of April 16, 2003 in exchange for 128,906 Pharmacia outstanding stock options (in thousands), calculated using the Black-Scholes option pricing model, modified for dividends, with model assumptions estimated as of April 16, 2003 and a Pfizer stock price of $29.81, which represented the average stock price for the period two days before through two days after the July 15, 2002 announcement of the merger agreement

 

 

 

 

1,102 million

 

 

 

 

 

 

Vested Share Award Programs

 

 

 

 

 

Share awards became fully vested in connection with the acquisition. The fair value of unissued shares of fully vested awards is based on the same exchange ratio as the common stock and a Pfizer stock price of $29.81. Awards can be settled in cash or shares, at the election of the program participant

 

 

 

 

130 million

 

 

 

 

 

 

Other transaction costs

 

 

 

 

90 million

 

 

 

 

 

 

Total estimated purchase price

 

 

 

$

55,962 million

 

The above purchase price has been preliminarily allocated based on an estimate of the fair value of assets acquired and liabilities assumed. The final valuation of net assets is expected to be completed as soon as possible, but no later than one year from the acquisition date in accordance with GAAP. To the extent that our estimates need to be adjusted, we will do so.

(in millions)

 

 

 

 

 

 

 

Estimated book value of net assets acquired

 

$

8,684 

 

 

 

 

Adjusted for write-off of existing goodwill and other intangible assets

 

 

1,448 

Adjusted estimated book value of net assets acquired

 

 

7,236 

Remaining allocation:

 

 

 

Increase inventory to fair value (a)

 

 

3,324 

Increase long-term investments to fair value (b)

 

 

40 

Increase property, plant and equipment to fair value (c)

 

 

775 

Record in-process research and development charge (d)

 

 

5,043 

Record identifiable intangible assets (e)

 

 

34,540 

Increase long-term debt to fair value

 

 

(370)

Increase benefit plan liabilities to fair value (f)

 

 

(1,349)

Increase other noncurrent liabilities to fair value (g)

 

 

(307)

Restructuring costs incurred through September 28, 2003 (h)

 

 

(1,319)

Deferred taxes (i)

 

 

(13,388)

Goodwill (j)

 

 

21,737

Estimated purchase price

 

$

55,962 

(a) Components of the increase to fair value for acquired inventory is as follows:

(in millions)

 

 

Finished goods

$

362

Work in process

 

2,693

Reversal of LIFO Reserve

 

269

Total

$

3,324

We have conformed Pharmacia inventory valuation methods to Pfizer's methodology, and as such, will no longer use the LIFO method of inventory valuation for these inventories.

(b) Primarily related to one publicly-traded, equity-method investment adjusted to fair value. The basis for the valuation was the quoted market price from the Stockholm Exchange.

(c) Components of the increase to fair value for acquired property, plant and equipment is as follows:

(in millions)

 

 

Land

$

(27)

Buildings

 

789 

Machinery and equipment

 

13 

Total

$

775 

(d) As required by Financial Accounting Standards Board Interpretation No. 4, Applicability of FASB Statement No. 2 to Business Combinations Accounted for by the Purchase Method (FIN 4), we recorded a charge of $5,043 million for the preliminary estimate of the portion of the purchase price allocated to acquired in-process research and development.

A project-by-project valuation using the guidance in SFAS No. 141, Business Combinations and the AICPA Practice Aid Assets Acquired in a Business Combination to be Used in Research and Development Activities: A Focus on Software, Electronic Devices and Pharmaceutical Industries (Practice Aid) is being performed by independent valuation specialists to determine the fair value of research and development projects of Pharmacia which were in-process, but not yet completed (collectively, In-Process Research and Development or IPR&D).

The fair value is determined using the income approach on a project-by-project basis. This method starts with a forecast of the expected future net cash flows.  These cash flows are then adjusted to present value by applying an appropriate discount rate that reflects the project's stage of completion and other risk factors. (These other risk factors can include the nature of the product, the scientific data associated with the technology, the current patent situation and market competition.) 

The forecast of future cash flows required the following assumptions to be made:

In addition, we considered:

To the extent that the IPR&D project is expected to utilize developed technology, the value of the in-process research and development project has been reduced to reflect this contribution. Developed technology represents the technical processes, intellectual property, and institutional understanding that were acquired from Pharmacia with respect to products, compounds and/or processes that have been completed and that may aid in the development of future products or processes.

 (e) Adjustment to record acquired identifiable intangible assets at fair value. A preliminary list of the acquired identifiable intangible assets is as follows:

a.

Developed technology

b.

Trademark/Brand names

c.

Customer lists/relationships

d.

Distribution agreements

e.

Supply agreements

The acquired identifiable intangible assets are attributable to the following categories:

 

(in millions)

 

Useful Lives
(years)

 

 

 

 

Developed technology rights

$24,871

 

3 - 20

Brands (finite-lived assets)

100

 

40

Brands (indefinite-lived assets)

8,917

 

 

Other (finite-lived assets)

143

 

2 - 20

Other (indefinite-lived assets)

509

 

 

Total

$34,540

 

 

Acquired identifiable intangible assets have been substantially allocated to the pharmaceutical segment ($32.3 billion).

Developed technology rights represent the value associated with developed technology to which Pfizer has all associated rights.  These rights can include the right to develop, use, market, sell and/or offer for sale the technical processes, intellectual property and institutional understanding (including the way in which compounds react in body, an understanding of the mechanisms of action which allows the compound to work and the knowledge related to the associated clinical and marketing studies performed for these compounds) that were acquired from Pharmacia with respect to products, compounds and/or processes that have been completed.  The valuation of these developed technology rights is derived from multiple cash flow streams, some of which are more certain than others.  For example, the valuation of Pharmacia's second-generation COX-2 inhibitor, valdecoxib, includes the cash flows associated with the sale of Bextra, the product line approved by regulators for the treatment of osteo and rheumatoid arthritis, as well as the value associated with using the developed technology (valdecoxib) in future IPR&D projects.  In this situation, the cash flows of the approved indications are more likely to be achieved than the potential cash flows associated with the R&D projects for the currently unapproved indications.  The unequal probability of realizing these cash flow streams reflects the uncertainty associated with the future benefits of individual R&D projects, even those that leverage the benefits of developed technology.  Of the value allocated to developed technology rights, approximately 95% is derived from regulatory-approved uses and indications.

Brands with indefinite-life treatment represent the value associated with tradenames, as the products themselves no longer receive patent protection.

The fair value of all of these intangible assets is determined using an income approach on a project-by-project basis.  This method starts with a forecast of all of the expected future net cash flows associated with the developed technology (both approved and unapproved uses), the brands and the other intangible assets.  These cash flows are then adjusted to present value by applying an appropriate discount rate that reflects the risk factors associated with the cash flow streams.

The forecast of future cash flows requires the following assumptions to be made:

The valuations are based on the information that is currently available and the expectations and assumptions that have been deemed reasonable by our management.  No assurance can be given, however, that the underlying assumptions or events associated with such assets will occur as projected.  For these reasons, among others, the actual results may vary from the projected results.

At least annually, we will evaluate all of these intangible assets for impairment. For developed technology rights, an element of the impairment review process will include an evaluation of the status of the various R&D programs that were a part of the fair valuation process. Given the general uncertainty of success that is associated with R&D projects in the pharmaceutical industry, the realization of these cash flow streams (those associated with unapproved indication) are not assured.

 (f) Adjust benefit plan liabilities to fair value.  Adjustment is included in Postretirement benefit obligation other than pension plans - $292 million and Pension benefit obligations - $1,057 million for pension obligations.

(g) Includes accruals for legal and environmental matters that we intend to resolve in a manner different from the manner Pharmacia had planned. Also, includes accruals for unfavorable leases and award programs which became fully vested in connection with the acquisition as well as the reversal of Pharmacia deferred income that no longer represents a performance obligation to third parties.

(h) Included in Other current liabilities are restructuring costs that impacted goodwill.  These exit costs are associated with Pharmacia employees, assets or activities and were recorded as a liability in conjunction with recording the initial purchase of Pharmacia.

(i) Reflects the estimated tax effects of the acquisition, including a provision for taxes on unremitted earnings of international Pharmacia subsidiaries that are not expected to be permanently reinvested overseas.

(j) In accordance with the requirements of SFAS No. 142, Goodwill and Other Intangible Assets, the goodwill and the acquired indefinite-lived intangibles associated with the merger will not be amortized. Goodwill resulting from this acquisition has been preliminarily allocated to the pharmaceutical segment ($20.0 billion) and the consumer healthcare segment ($1.7 billion).

The following unaudited pro forma financial information presents the combined results of operations of Pfizer and Pharmacia as if the acquisition had occurred as of the beginning of the periods presented. The unaudited pro forma financial information is not necessarily indicative of what our consolidated results of operations actually would have been had we completed the acquisition at the dates indicated.  In addition, the unaudited pro forma financial information does not purport to project the future results of operations of the combined company.

 

 

Three Months Ended

 

 

Nine Months Ended

 

 

Sept. 28,
2003

 

Sept. 29,
2002

 

 

Sept. 28,
2003

 

Sept. 29,
2002 

(in millions, except per common share amounts)

 

(unaudited)

 

 

(unaudited)

 

 

 

 

 

 

 

 

 

 

Revenues

$

12,504

$

11,209

 

$

34,728

$

32,331

Income from continuing operations before cumulative effect of change in accounting principles

 

3,067

 

2,370

 

 

7,044

 

6,833

Net income

 

3,063

 

1,430

 

 

9,248

 

4,806

Per share amounts:

 

 

 

 

 

 

 

 

 

Income from continuing operations before cumulative effect of change in accounting principles per common share-basic

 

.40

 

.30

 

 

.90

 

.86

Net income per common share-basic

 

.40

 

.18

 

 

1.18

 

.60

Income from continuing operations before cumulative effect of change in accounting principles per common share-diluted

 

.39

 

.30

 

 

.89

 

.84

Net income per common share-diluted

 

.39

 

.18

 

 

1.17

 

.59

The unaudited pro forma financial information above reflects the following:

  1. The elimination of balances and transactions between Pfizer and Pharmacia, which upon completion of the merger would be considered intercompany balances and transactions.  The majority of these transactions occurred under the Celebrex and Bextra marketing agreements. The entries include:
    • the elimination of certain sales, alliance revenue and certain co-promotion expenses; and
    • the elimination of the impact of milestone payments made by Pfizer to Pharmacia.
  2. The elimination of historical amortization expense recorded by legacy Pharmacia related to definite-lived intangible assets.
  3. A decrease in interest expense of $9 million and $27 million in the third quarter and first nine months of 2003 and $9 million and $29 million in the third quarter and first nine months of 2002 related to the estimated fair value adjustment of long-term debt from the purchase price allocation.
  4. Additional amortization expense related to the estimated fair value of identifiable intangible assets from the purchase price allocation, which are being amortized over their estimated useful lives over a range of 2 to 40 years, of approximately $655 million and $2,069 million in the third quarter and first nine months of 2003 and $703 million and $2,108 million in the third quarter and first nine months of 2002.
  5. Additional depreciation expense related to the estimated fair value step-up of the property, plant and equipment from the purchase price allocation, which is being depreciated over its estimated useful life of approximately $49 million and $97 million in the third quarter and first nine months of 2003 and $17 million and $51 million in the third quarter and first nine months of 2002.

The unaudited pro forma financial information above excludes the following material, non-recurring charges in the three and nine month periods ended September 28, 2003:

Note 3:  Adoption of New Accounting Standards

Accounting for Asset Retirement Obligations

On January 1, 2003, we adopted the provisions of SFAS No. 143, Accounting for Asset Retirement Obligations. SFAS No. 143 addresses financial accounting requirements for retirement obligations associated with tangible long-lived assets. As a result of adopting SFAS No. 143, we recorded a non-cash pre-tax charge of $47 million ($30 million net of tax) in the first quarter of 2003 for the change in accounting for costs associated with the eventual retirement of certain manufacturing and research facilities. This charge is reported as a one-time cumulative effect of a change in accounting principle as of the beginning of 2003. Our asset retirement obligations primarily relate to remediation and land restoration requirements.

Accounting for Costs Associated with Exit or Disposal Activities

On January 1, 2003, we adopted the provisions of SFAS No. 146, Accounting for Costs Associated with Exit or Disposal Activities. SFAS No. 146 applies to costs associated with an exit activity that is not related to an entity newly acquired in a business combination. SFAS No. 146 amends existing accounting rules for these costs by requiring that a liability be recorded at fair value when incurred. The liability is subject to adjustment for the passage of time, timing of payments and changes in the estimated payments. SFAS No. 146 also provides specific guidance for lease termination costs and one-time employee termination benefits when incurred as part of an exit or disposal activity. SFAS No. 146 changes the measurement and timing of costs associated with exit and disposal activities initiated after December 31, 2002.

Note 4:  Goodwill and Other Intangible Assets

The changes in the carrying amount of goodwill for the nine months ended September 28, 2003, by segment, follow:

(in millions)

 

Pharmaceutical

 

Consumer
Healthcare

 

Other

 

Total

 

 

 

 

 

 

 

 

 

Balance, December 31, 2002

$

362

$

829

$

9

$

1,200

Goodwill - Pharmacia acquisition (preliminary estimate)

 

20,063

 

1,674

 

--

 

21,737

Other changes during the period*

 

30

 

5

 

--

 

35

Balance, September 28, 2003

$

20,455

$

2,508

$

9

$

22,972

*Primarily reflects the impact of foreign exchange.

 

Gross Carrying Amount

 

 

Accumulated Amortization

 

(in millions)

 

Sept 28, 
2003 

 

Dec. 31, 
2002
 

 

 

Sept. 28, 
2003 

 

Dec. 31, 
2002
 

 

 

 

 

 

 

 

 

 

 

 

 

Amortized intangible assets:

 

 

 

 

 

 

 

 

 

 

Developed technology rights

$

24,871 

$

-- 

 

$

(1,241)

$

-- 

 

Trademarks

 

139 

 

133 

 

 

(75)

 

(72)

 

License agreements

 

50 

 

42 

 

 

(11)

 

(25)

 

Patents

 

35 

 

33 

 

 

(29)

 

(24)

 

Product rights*

 

549 

 

526 

 

 

(108)

 

(72)

 

Noncompete agreements

 

49 

 

48 

 

 

(43)

 

(39)

 

Customer contracts

 

143 

 

-- 

 

 

(15)

 

-- 

 

Other

 

187 

 

78 

 

 

(41)

 

(31)

 

Total amortized intangible assets

 

26,023 

 

860 

 

 

(1,563)

 

(263)

 

Unamortized identifiable intangible assets:

 

 

 

 

 

 

 

 

 

 

Brands acquired as part of the Pharmacia acquisition

 

8,917 

 

-- 

 

 

-- 

 

-- 

 

License agreements

 

480 

 

-- 

 

 

-- 

 

-- 

 

Trademarks

 

235 

 

240 

 

 

-- 

 

-- 

 

Pension asset

 

34 

 

60 

 

 

-- 

 

-- 

 

Other

 

53 

 

24 

 

 

-- 

 

-- 

 

Total unamortized intangible assets

 

9,719 

 

324 

 

 

-- 

 

-- 

 

Total identifiable intangible assets

$

35,742 

$

1,184 

 

$

(1,563)

$

(263)

 

 

 

 

 

 

 

 

 

 

 

 

*

Includes a post-approval milestone payment that we made during the first quarter of 2003 under our alliance agreement for Celebrex. Such payment was made prior to the completion of our acquisition of Pharmacia.

Total amortization expense for finite-lived intangible assets was $686 million for the three months ended September 28, 2003 and $1,308 million for the nine months ended September 28, 2003. Amortization expense for finite-lived intangible assets is recorded in various expenses in the condensed consolidated statement of income, including Cost of sales, Research and development expenses and Other (income)/deductions-net.

The annual amortization expense expected for the years 2003 through 2008 is as follows:

 

(in millions)

2003

$2,067

2004

$2,884

2005

$2,880

2006

$2,747

2007

$2,629

2008

$2,225

Note 5:  Financial Instruments

A.  Long-Term Debt

In February 2003, we issued:

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 nine months of 2003, 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 currency denominated transactions (in millions):

Financial Instrument

 

Hedge Type

 

Hedged or Offset Item

 

Notional Amount

 

Maturity Date

Forward contracts

 

--

 

Short-term foreign currency assets and liabilities

 

      $3,033

 

Through 2003

Forward contracts

 

Cash flow

 

Euro available-for-sale investments

 

        1,950

 

Through 2003

Forward contracts

 

Cash flow

 

Australian dollar intercompany loan

 

           281

 

Through 2003

Forward contracts

 

Cash flow

 

Swedish kroner intercompany deposit

 

           209

 

Through 2003

Interest Rate Risk

The derivative financial instruments employed to manage interest rate risk follow (in millions):

Financial Instrument

 

Hedge Type

 

Hedged or Offset Item

 

Notional Amount

 

Maturity Date

 

Principal amortizing swaps

 

Fair value

 

U.S. dollar fixed rate debt (1)

 

         $660

 

2028

 

Swaps

 

Fair value

 

U.S. dollar fixed rate investment (1)

 

           500

 

2008

 

Principal amortizing swaps

 

Fair value

 

U.S. dollar fixed rate debt (1)

 

           461

 

2018

 

Swaps

 

Fair value

 

U.S. dollar fixed rate debt (1)

 

           375

 

2005

 

Swaps

 

Fair value

 

U.S. dollar fixed rate debt (1)

 

           300

 

2009

 

Swaps

 

Fair value

 

U.S. dollar fixed rate debt (1)

 

           300

 

2018

 

Swaps

 

Fair value

 

U.S. dollar fixed rate debt (1)

 

           200

 

2008

 

Principal amortizing swaps

 

Fair value

 

U.S. dollar fixed rate debt (1)

 

           200

 

2027

 

 

 

 

 

 

 

 

 

 

 

(1)

Serves to reduce exposure to long-term U.S. dollar interest rates by effectively converting fixed rates associated with long-term assets or debt obligations to floating rates.

There was no material ineffectiveness in any hedging relationship reported in earnings in the first nine months of 2003.

Note 6:  Merger-Related Costs

We incurred the following merger-related costs in connection with our merger with Warner-Lambert Company (Warner-Lambert) which was completed on June 19, 2000 and our acquisition of Pharmacia which was completed on April 16, 2003:

 

 

Three Months Ended

 

 

Nine Months Ended

(in millions)

 

Sept. 28, 
2003 

 

Sept. 29, 
2002 

 

 

Sept. 28, 
2003 

 

Sept. 29, 
2002 

 

 

 

 

 

 

 

 

 

 

Integration costs - Warner-Lambert

$

$

99 

 

$

23 

$

276 

Integration costs - Pharmacia

 

251 

 

 

 

552 

 

Restructuring charges - Warner-Lambert

 

(4)

 

14 

 

 

(1)

 

110 

Restructuring charges - Pharmacia

 

54 

 

-- 

 

 

106 

 

-- 

Total merger-related costs

$

303 

$

114 

 

$

680 

$

387 

Integration costs represent external, incremental costs directly related to our merger with Warner-Lambert and acquisition of Pharmacia, including expenditures for consulting and systems integration.

Restructuring Charges - Warner-Lambert

The components of the restructuring charges associated with the merger of the Warner-Lambert operations follow:

 

 

Provisions

 

 

 

 

 

(in millions)

 

Year
2000

 

Year
2001

 

Year
2002

 

Nine Months
Ended
Sept. 28,
2003

 

Total

 

 

Utilization 
Through 
Sept. 28, 
2003 

 

Reserve*
Sept. 28,
2003

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Employee termination costs

$

850

$

249

$

170

$

(1)

$

1,268

 

$

(1,260)

$

8

Property, plant and equipment

 

46

 

84

 

4

 

--

 

134

 

 

(134)

 

--

Other

 

21

 

30

 

13

 

--

 

64

 

 

(64)

 

--

 

$

917

$

363

$

187

$

(1)

$

1,466

 

$

(1,458)

$

8

*Included in Other current liabilities.

Through September 28, 2003, the charges for employee termination costs represent the approved reduction of our work force of our continuing businesses by 8,067 people, mainly in administrative functions for corporate, manufacturing, distribution, sales and research. We notified affected individuals and as of September 28, 2003, 7,697 employees were terminated. Employee termination costs include accrued severance benefits and costs associated with change-in-control provisions of certain Warner-Lambert employment contracts. Under the terms of Warner-Lambert employment contracts, certain terminated employees may elect to defer receipt of severance benefits. Severance benefits deferred for future payments were $230 million at September 28, 2003 and $218 million at December 31, 2002. The deferred severance benefits are considered utilized charges and are included in Other noncurrent liabilities in the condensed balance sheet.

Restructuring Charges - Pharmacia

During the second and third quarters of 2003, in connection with the acquisition of Pharmacia, Pfizer management approved and initiated plans to restructure the operations of both legacy Pfizer and legacy Pharmacia to eliminate duplicative facilities and reduce costs.

We recorded $106 million of restructuring costs associated primarily with exiting certain activities of legacy Pfizer, including severance, costs of vacating duplicative facilities and contract termination costs. These costs have been recorded as a charge to the results of operations through the nine months ended September 28, 2003 and are included in Merger-related costs. The components of the restructuring charges associated with the acquisition of Pharmacia which were expensed in 2003 follow:

 

 

Provisions

 

 

 

 

(in millions)

 

Nine
Months Ended
Sept. 28,
2003

 

Total

 

Utilization 
Through 
Sept. 28,
2003 

 

Reserve*
Sept. 28,
2003

 

 

 

 

 

 

 

 

 

Employee termination costs

$

76

$

76

$

(44)

$

32

Asset impairments

 

15

 

15

 

(15)

 

--

Other

 

15

 

15

 

(4)

 

11

 

$

106

$

106

 

$

(63)

$

43

*Included in Other current liabilities.

Through September 28, 2003, the charges for employee termination costs represent the approved reduction of the legacy Pfizer work force by 865 people, mainly in administrative functions for corporate, manufacturing, distribution, sales and research. We notified affected individuals and as of September 28, 2003, 706 employees were terminated. Asset impairments primarily include charges to write-down property, plant and equipment. Other primarily includes costs to exit certain activities of legacy Pfizer.

Pharmacia Acquisition-Related Restructuring Costs Capitalized in 2003 as a Cost of the Acquisition

We recorded $1,319 million of similar restructuring costs associated primarily with exiting certain activities of legacy Pharmacia.  These costs are accounted for under Emerging Issues Task Force (EITF) Issue No. 95-3, Recognition of Liabilities in Connection with Purchase Business Combinations, and were recognized as a liability assumed in the purchase business combination. Accordingly, these costs were included in the allocation of the cost to acquire Pharmacia and have been recorded as an increase to goodwill. In accordance with EITF 95-3, these restructuring costs also include costs associated with relocation. The restructuring liabilities are included in Other current liabilities. The components of the restructuring costs capitalized in 2003 as a cost of the acquisition of Pharmacia follow:

 

 

Costs Incurred

 

 

 

 

(in millions)

 

Nine
Months Ended
Sept. 28,
2003

 

Total

 

Utilization 
Through 
Sept. 28, 
2003 

 

Reserve
Sept. 28,
2003

 

 

 

 

 

 

 

 

 

Employee termination costs

$

1,065

$

1,065

$

(742)

$

323

Asset impairments

 

27

 

27

 

(27)

 

--

Relocation costs

 

96

 

96

 

(24)

 

72

Other

 

131

 

131

 

(11)

 

120

 

$

1,319

$

1,319

$

(804)

$

515

Through September 28, 2003, the employee termination costs represent the approved reduction of the legacy Pharmacia work force by 9,425 people, mainly in corporate, manufacturing, distribution, sales and research. We notified affected individuals and as of September 28, 2003, 8,271 employees were terminated.  Employee termination costs include accrued severance benefits and costs associated with change in control provisions of certain Pharmacia employment contracts. Asset impairments primarily include charges to write-down property, plant and equipment. Other includes costs to exit certain activities of legacy Pharmacia.

Changes to the estimates of completing the currently approved restructuring plans or costs related to new restructuring initiatives will be recorded in results of operations for legacy Pfizer and will be recorded in goodwill for legacy Pharmacia for one year following the acquisition date of April 16, 2003.

Note 7:  Comprehensive Income

 

 

Three Months Ended

 

 

Nine Months Ended

(in millions)

 

Sept. 28, 
2003 

 

 

Sept. 29, 
2002 

 

 

Sept. 28, 
2003 

 

 

Sept. 29,  2002 

 

 

 

 

 

 

 

 

 

 

 

 

Net income

$

2,235 

 

$

2,350 

 

$

3,308 

 

$

6,270 

Other comprehensive income/(expense):

 

 

 

 

 

 

 

 

 

 

 

Holding gain/(loss) on investment securities arising during period-net of tax

 

(12)

 

 

28 

 

 

(157)

 

 

(43)

Reclassification adjustment-net of tax

 

-- 

 

 

-- 

 

 

 

 

-- 

Net gain/(loss) on investment securities

 

(12)

 

 

28 

 

 

(152)

 

 

(43)

Currency translation adjustment and hedges

 

(806)

 

 

250 

 

 

593 

 

 

114 

Total other comprehensive income/(expense)

 

(818)

 

 

278 

 

 

441 

 

 

71 

Total comprehensive income

$

1,417 

 

$

2,628 

 

$

3,749 

 

$

6,341 

The change in currency translation adjustment and hedges included in Accumulated other comprehensive expense for the first nine months of 2003 was:

(in millions)

 

2003 

 

 

 

Opening balance

$

(1,438)

Translation adjustments and hedges

 

593 

Ending balance

$

(845)

 

Note 8:   Earnings Per Common Share

Basic and diluted earnings per common share (EPS) were computed using the following common share data:

 

 

Three Months Ended

 

 

Nine Months Ended

(in millions)

 

Sept. 28, 
2003 

 

Sept. 29, 
2002 

 

 

Sept. 28, 
2003 

 

Sept. 29, 
2002 

 

 

 

 

 

 

 

 

 

 

EPS Numerator - Basic:

 

 

 

 

 

 

 

 

 

Income from continuing operations before cumulative effect of change in accounting principles

$

2,239 

$

2,269 

 

$

1,025 

$

6,473 

 

 

 

 

 

 

 

 

 

 

Less:  Preferred stock dividends - net of tax

 

 

-- 

 

 

 

-- 

 

 

 

 

 

 

 

 

 

 

Income available to common shareholders from continuing operations before cumulative effect of change in accounting principles

 

2,238 

 

2,269 

 

 

1,023 

 

6,473 

 

 

 

 

 

 

 

 

 

 

Discontinued operations:

 

 

 

 

 

 

 

 

 

Income/(loss) from operations of discontinued businesses/product lines-net of tax

 

(4)

 

81 

 

 

28 

 

207 

Gains on sales of discontinued businesses/product lines-net of tax

 

-- 

 

-- 

 

 

2,285 

 

-- 

 

 

 

 

 

 

 

 

 

 

Discontinued operations-net of tax

 

(4)

 

81 

 

 

2,313 

 

207 

 

 

 

 

 

 

 

 

 

 

Income available to common shareholders before cumulative effect of change in accounting principles

 

2,234 

 

2,350 

 

 

3,336 

 

6,680 

 

 

 

 

 

 

 

 

 

 

Cumulative effect of change in accounting principles-net of tax

 

-- 

 

-- 

 

 

(30)

 

(410)

 

 

 

 

 

 

 

 

 

 

Net income available to common shareholders

$

2,234 

$

2,350 

 

$

3,306 

$

6,270 

 

 

 

 

 

 

 

 

 

 

EPS Denominator - Basic:

 

 

 

 

 

 

 

 

 

Weighted average number of common shares outstanding

 

7,710.7 

 

6,126.3 

 

 

7,088.5 

 

6,172.3 

 

 

 

 

 

 

 

 

 

 

EPS Numerator - Diluted:

 

 

 

 

 

 

 

 

 

Income from continuing operations before cumulative effect of change in accounting principles

$

2,239 

$

2,269 

 

$

1,025 

$

6,473 

 

 

 

 

 

 

 

 

 

 

Less:  ESOP contribution - net of tax

 

 

-- 

 

 

 

-- 

 

 

 

 

 

 

 

 

 

 

Income available to common shareholders from continuing operations before cumulative effect of change in accounting principles

 

2,238 

 

2,269 

 

 

1,023 

 

6,473 

 

 

 

 

 

 

 

 

 

 

Discontinued operations:

 

 

 

 

 

 

 

 

 

Income/(loss) from operations of discontinued businesses/product lines-net of tax

 

(4)

 

81 

 

 

28 

 

207 

Gains on sales of discontinued businesses/product lines-net of tax

 

-- 

 

-- 

 

 

2,285 

 

-- 

 

 

 

 

 

 

 

 

 

 

Discontinued operations-net of tax

 

(4)

 

81 

 

 

2,313 

 

207 

 

 

 

 

 

 

 

 

 

 

Income available to common shareholders before cumulative effect of change in accounting principles

 

2,234 

 

2,350 

 

 

3,336 

 

6,680 

 

 

 

 

 

 

 

 

 

 

Cumulative effect of change in accounting principles-net of tax

 

-- 

 

-- 

 

 

(30)

 

(410)

 

 

 

 

 

 

 

 

 

 

Net income available to common shareholders

$

2,234 

$

2,350 

 

$

3,306 

$

6,270 

 

 

 

 

 

 

 

 

 

 

EPS Denominator - Diluted:

 

 

 

 

 

 

 

 

 

Weighted average number of common shares outstanding

 

7,710.7 

 

6,126.3 

 

 

7,088.5 

 

6,172.3 

Common share equivalents--stock options, stock issuable under employee compensation plans and convertible preferred stock

 

80.5 

 

75.9 

 

 

72.2 

 

89.9 

Weighted average number of common shares outstanding and common share equivalents

 

7,791.2 

 

6,202.2 

 

 

7,160.7 

 

6,262.2 

Stock options and stock issuable under employee compensation plans representing equivalents of 317 million and 336 million shares of common stock during the three months and nine months ended September 28, 2003 and 297 million and 204 million shares of common stock during the three months and nine months ended September 29, 2002 had exercise prices greater than the average market price of our common stock. These common stock equivalents were outstanding during the three months and nine months ended September 28, 2003 and September 29, 2002 but were excluded from the computation of diluted EPS for those periods because their inclusion would have had an antidulutive effect.

Also, in the diluted computation, income from continuing operations and net income are reduced by the incremental contribution to the ESOP, acquired as part of the Pharmacia acquisition. This contribution is the after-tax difference between the income that the ESOP would have received in preferred stock dividends and the dividend on the common shares assumed to have been outstanding.

Under GAAP, quarterly EPS computations must stand on their own and therefore, the sum of EPS for each of the first three quarters of 2003 does not equal the EPS for the first nine months of 2003. EPS for the third quarter of 2003 is computed using the weighted average number of common shares outstanding during the quarter while EPS for the first nine months of 2003 is computed using the weighted average number of common shares outstanding during the first nine months of 2003. The weighted average number of common shares outstanding is higher for the third quarter of 2003 than for the first nine months of 2003 as a result of issuing approximately 1.8 billion common shares to complete the Pharmacia acquisition on April 16, 2003. The significant increase in the number of common shares outstanding from the first quarter of 2003 has resulted in our having different bases of shares outstanding and therefore, the EPS results are not additive.

Note 9:  Stock Option and Performance Unit Awards

In connection with the Pharmacia acquisition on April 16, 2003, we issued approximately 180 million Pfizer stock options in exchange for Pharmacia outstanding stock options. The following table summarizes the activity for our stock and incentive plans related to employees during the first nine months of 2003:

 

Under Option

(thousands of shares)

Shares

 

 

Weighted Average
Exercise Price
Per Share

 

 

 

 

 

Balance January 1, 2003

431,981 

 

 

$31.45

Pharmacia Option Exchange

180,068 

 

 

28.84

Granted

101,890 

 

 

29.78

Exercised

(45,306)

 

 

18.59

Cancelled

(31,004)

 

 

36.64

Balance September 28, 2003

637,629 

 

 

31.11

The tax benefits related to certain stock option transactions were $192 million during the nine months ended September 28, 2003.

Note 10:  Segment Information

We operate in the following three business segments:

Pharmaceutical

Consumer Healthcare

Animal Health

We operate several other businesses which include the manufacture of empty soft-gelatin capsules, contract manufacturing, bulk pharmaceutical chemicals and diagnostics. 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 September 28, 2003 and September 29, 2002 were as follows:

(in millions)

 

 

 

Pharma-
ceutical

 

Consumer
Healthcare

 

Animal
Health

 

Other

(a)

 

Consolidated

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Revenues

2003

 

$

11,002

$

799

$

438

$

265 

 

$

12,504

 

 

2002

 

 

6,996

 

610

 

280

 

110 

 

 

7,996

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Segment profit/(loss)

2003

 

$

2,874

$

189

$

152

$

(721)

(b)

$

2,494

(c)

 

2002

 

 

3,074

 

152

 

26

 

(352)

(b)

 

2,900

(c)

Revenues and profits/(losses) by segment for the nine months ended September 28, 2003 and September 29, 2002 were as follows:

(in millions)

 

 

 

Pharma-
ceutical

 

Consumer
Healthcare

 

Animal
Health

 

Other

(a)

 

Consolidated

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Revenues

2003

 

$

27,190

$

2,135

$

1,090

$

607 

 

$

31,022

 

 

 

2002

 

 

20,031

 

1,897

 

794

 

317 

 

 

23,039

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Segment profit/(loss)

2003

 

$

3,627

$

364

$

19

$

(1,698)

(b)

$

2,312

(c)

 

 

2002

 

 

8,832

 

451

 

65

 

(1,015)

(b)

 

8,333

(c)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(a)

Includes Capsugel, Pfizer CentreSource, Diagnostics and Corporate/Other.

 

 

(b)

Includes interest income/(expense), corporate expenses, other income/(expense) of our banking and insurance subsidiaries, certain performance-based compensation expenses not allocated to the operating segments and merger-related costs.

 

 

(c)

Equals income from continuing operations before provision for taxes on income, minority interests and cumulative effect of change in accounting principles. In 2003, segment profit/(loss) includes the impact of purchase accounting for the Pharmacia acquisition.

On July 24, 2003, we announced that we are exploring strategic options for our surgical ophthalmology business, including its possible sale. The surgical ophthalmology business is included in our Pharmaceutical segment and became a part of Pfizer in April 2003 with our acquisition of Pharmacia.

On July 1, 2003, we announced that we are exploring strategic options for the Diagnostics business, including its possible sale. The Diagnostics business became a part of Pfizer in April 2003 with our acquisition of Pharmacia.

Revenues for each group of similar products are as follows:

 

 

Three Months Ended

 

 

Nine Months Ended

(in millions)

 

Sept. 28,
2003

 

Sept. 29,
2002

 


% Change

 

 

Sept. 28,
2003

 

Sept. 29,
2002

 


% Change

 

 

 

 

 

 

 

 

 

 

 

 

 

 

PHARMACEUTICAL

 

 

 

 

 

 

 

 

 

 

 

 

 

Cardiovascular and metabolic diseases

$

4,298

$

3,429

 

25 

 

$

11,450

$

9,761

 

17 

Central nervous system disorders

 

1,993

 

1,411

 

41 

 

 

5,181

 

4,056

 

28 

Arthritis and pain

 

1,078

 

88

 

 

 

1,815

 

260

 

598 

Infectious and respiratory diseases

 

1,095

 

807

 

36 

 

 

3,084

 

2,450

 

26 

Urology

 

701

 

437

 

60 

 

 

1,700

 

1,244

 

37 

Oncology

 

262

 

--

 

-- 

 

 

461

 

--

 

-- 

Ophthalmology

 

310

 

--

 

-- 

 

 

441

 

--

 

-- 

Endocrine disorders

 

216

 

--

 

-- 

 

 

323

 

--

 

-- 

All other

 

940

 

390

 

141 

 

 

2,109

 

1,139

 

85 

Alliance revenue

 

109

 

434

 

(75)

 

 

626

 

1,121

 

(44)

Total Pharmaceutical

 

11,002

 

6,996

 

57 

 

 

27,190

 

20,031

 

36 

CONSUMER HEALTHCARE

 

799

 

610

 

31 

 

 

2,135

 

1,897

 

13 

ANIMAL HEALTH

 

438

 

280

 

56 

 

 

1,090

 

794

 

37 

OTHER

 

265

 

110

 

144 

 

 

607

 

317

 

91 

Total revenues

$

12,504

$

7,996

 

56 

 

$

31,022

$

23,039

 

35 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

*  Change greater than one thousand percent.

Note 11:  Discontinued Operations

We sold the following businesses and products that did not fit within our strategic plans:

These businesses and product lines are reflected as discontinued operations in all periods presented.

The following amounts related to the confectionery, shaving and fish-care product businesses, as well as the femhrt, Loestrin and Estrostep product lines, have been segregated from continuing operations and reflected as discontinued operations:

 

 

Three Months Ended

 

 

Nine Months Ended

(in millions)

 

Sept. 28,
2003

 

Sept. 29,
2002

 

 

Sept. 28,
2003