Pfizer 2005 Annual Report Download - page 24

2005 Financial Report 23
Financial Review
Pfizer Inc and Subsidiary Companies
The components of restructuring charges associated with AtS
follow:
UTILIZATION ACCRUAL
COSTS THROUGH AS OF
INCURRED DEC. 31, DEC. 31,
__________ ___________ ___________
(MILLIONS OF DOLLARS) 2005 2005 2005(a)
Employee termination costs $305 $166 $139
Asset impairments 131 131 —
Other 14 3 11
$450 $300 $150
(a) Included in Other current liabilities.
Through December 31, 2005, Employee termination costs
represent the approved reduction of the workforce by 2,602
employees, mainly in manufacturing, sales and research. We
notified affected individuals and 2,425 employees were terminated
as of December 31, 2005. Employee termination costs are recorded
as incurred and include accrued severance benefits, pension and
postretirement benefits. Asset impairments primarily include
charges to write off inventory and write down property, plant and
equipment. Other primarily includes costs to exit certain activities.
Other (Income)/Deductions — Net
In 2005, Pfizer recorded impairment charges of $1.1 billion related
to the developed technology rights for Bextra, a selective COX-
2 inhibitor, and $5 million related to the write-off of machinery
and equipment. In 2004, we recorded an impairment charge of
$691 million related to the Depo-Provera brand and a litigation-
related charge of $369 million related to the resolution of claims
against Quigley Company, Inc., a wholly-owned subsidiary of
Pfizer. In 2003, we recorded charges totaling $1.4 billion to cover
the resolution of two legacy Warner-Lambert legal matters
relating to Rezulin personal injury claims and a government
investigation of marketing practices relating to Neurontin. See also
Notes to Consolidated Financial Statements—Note 6, Other
(Income)/Deductions—Net.
Taxes on Income
In 2005, we recorded an income tax charge of $1.7 billion, included
in Provision for taxes on income, in connection with our decision
to repatriate approximately $37 billion of foreign earnings in
accordance with the American Jobs Creation Act of 2004 (the Jobs
Act). The Jobs Act created a temporary incentive for U.S.
corporations to repatriate accumulated income earned abroad by
providing an 85% dividend-received deduction for certain
dividends from controlled foreign corporations in 2005. In
addition, during 2005, we recorded a tax benefit of $586 million,
primarily related to the resolution of certain tax positions.
Our overall effective tax rate for continuing operations was
29.7% in 2005, 19.0% in 2004 and 49.7% in 2003. The higher tax
rate in 2005 compared to 2004 was attributable to the previously
mentioned tax charge associated with the repatriation of foreign
earnings and higher non-deductible charges for merger-related
IPR&D, primarily relating to our acquisition of Vicuron and Idun
in 2005, partially offset by the tax benefit of $586 million related
to the resolution of certain tax positions. The lower tax rate in
2004 compared to 2003 was attributable to decreased non-
deductible merger-related IPR&D charges.
On January 25, 2006, the Company was notified by the IRS Appeals
Division that a resolution had been reached on one matter that
we were in the process of appealing related to the tax deductibility
of a breakup fee paid by the Warner-Lambert Company in 2000.
As a result, in the first quarter of 2006, we will record favorable
adjustments of approximately $450 million.
On January 23, 2006, the IRS issued final regulations on Statutory
Mergers and Consolidations,which impact certain prior period
transactions. The regulations could result in benefits ranging
from approximately $75 million to $214 million in the first quarter
of 2006 subject to certain management decisions.
Discontinued Operations
See our discussion in the “Acquisitions and Dispositions” section
of this Financial Review for a complete discussion of dispositions.
The following amounts have been segregated from continuing
operations and reported as discontinued operations, and in 2003,
primarily related to the disposition of the Adams confectionery
products business and the Schick-Wilkinson Sword business:
YEAR ENDED DEC. 31,
________________________________________________
(MILLIONS OF DOLLARS) 2005 2004 2003
Revenues $ 55 $405 $1,214
Pre-tax (loss)/income (33) (39) 43
(Benefit) from/provision
for taxes(a) (2) (17) 17
(Loss)/income from
discontinued operations—
net of tax (31) (22) 26
Pre-tax gains on sales of
discontinued operations 77 75 3,885
Provision for taxes on gains(b) 30 24 1,600
Gains on sales of
discontinued operations—
net of tax 47 51 2,285
Discontinued operations—
net of tax $ 16 $29 $2,311
(a) Includes a deferred tax expense of $23 million in 2005, a deferred
tax benefit of $15 million in 2004 and a deferred tax expense of
$8 million in 2003.
(b) Includes a deferred tax expense of nil in 2005 and 2004, and $744
million in 2003.
Adjusted Income
General Description of Adjusted Income Measure
Adjusted income is an alternative view of performance used by
management and we believe that investors’ understanding of our
performance is enhanced by disclosing this performance measure.
The Company reports Adjusted income in order to portray the
results of our major operations—the discovery, development,
manufacture, marketing and sale of prescription medicines for
humans and animals, as well as our over-the-counter products—
prior to considering certain income statement elements. We have
defined Adjusted income as Net income before significant impact
of purchase accounting for acquisitions, merger-related costs,
discontinued operations, the cumulative effect of a change in
accounting principles and certain significant items. The Adjusted
income measure is not, and should not be viewed as, a substitute
for U.S. GAAP Net income.