Pfizer 2006 Annual Report Download - page 28

26 2006 Financial Report
Financial Review
Pfizer Inc and Subsidiary Companies
Acquisition-Related Costs
Adjusted income is calculated prior to considering integration and
restructuring charges associated with business combinations
because these costs are unique to each transaction and represent
costs that were incurred to restructure and integrate two
businesses as a result of the acquisition decision. For additional
clarity, only restructuring and integration activities that are
associated with a purchase business combination or a net-asset
acquisition are included in acquisition-related costs. We have not
factored in the impacts of synergies that would have resulted had
these costs not been incurred.
We believe that viewing income prior to considering these charges
provides investors with a useful additional perspective because the
significant costs incurred in a business combination result primarily
from the need to eliminate duplicate assets, activities or
employees—a natural result of acquiring a fully integrated set of
activities. For this reason, we believe that the costs incurred to
convert disparate systems, to close duplicative facilities or to
eliminate duplicate positions (for example, in the context of a
business combination) can be viewed differently from those costs
incurred in other, more normal business contexts.
The integration and restructuring charges associated with a
business combination may occur over several years, with the
more significant impacts ending within three years of the
transaction. Because of the need for certain external approvals for
some actions, the span of time needed to achieve certain
restructuring and integration activities can be lengthy. For
example, due to the highly regulated nature of the pharmaceutical
business, the closure of excess facilities can take several years, as
all manufacturing changes are subject to extensive validation
and testing and must be approved by the FDA. In other situations,
we may be required by local laws to obtain approvals prior to
terminating certain employees. This approval process can delay
the termination action.
Discontinued Operations
Adjusted income is calculated prior to considering the results of
operations included in discontinued operations, such as our
Consumer Healthcare business, which we sold in December 2006,
as well as any related gains or losses on the sale of such operations.
We believe that this presentation is meaningful to investors
because, while we review our businesses and product lines
periodically for strategic fit with our operations, we do not build
or run our businesses with an intent to sell them.
Cumulative Effect of a Change in Accounting Principles
Adjusted income is calculated prior to considering the cumulative
effect of a change in accounting principles. The cumulative effect
of a change in accounting principles is generally one time in
nature and not expected to occur as part of our normal business
on a regular basis.
Certain Significant Items
Adjusted income is calculated prior to considering certain
significant items. Certain significant items represent substantive,
unusual items that are evaluated on an individual basis. Such
evaluation considers both the quantitative and the qualitative
aspect of their unusual nature. Unusual, in this context, may
represent items that are not part of our ongoing business; items
that, either as a result of their nature or size, we would not
expect to occur as part of our normal business on a regular basis;
items that would be non-recurring; or items that relate to products
we no longer sell. While not all-inclusive, examples of items that
could be included as certain significant items would be a major
non-acquisition-related restructuring charge and associated
implementation costs for a program which is specific in nature with
a defined term, such as those related to our AtS initiative; costs
associated with a significant recall of one of our products; charges
related to sales or disposals of products or facilities that do not
qualify as discontinued operations as defined by U.S. GAAP;
certain intangible asset impairments; adjustments related to the
resolution of certain tax positions; the impact of adopting certain
significant, event-driven tax legislation, such as charges
attributable to the repatriation of foreign earnings in accordance
with the Jobs Act; or possible charges related to legal matters, such
as certain of those discussed in Legal Proceedings in our Form
10-K and in Part II: Other Information; Item 1, Legal Proceedings
included in our Form 10-Q filings. Normal, ongoing defense costs
of the Company or settlements and accruals on legal matters
made in the normal course of our business would not be
considered certain significant items.
Reconciliation
A reconciliation between Net income, as reported under U.S.
GAAP, and Adjusted income follows:
YEAR ENDED DEC. 31, % CHANGE
__________________________________________ _________________
(MILLIONS OF DOLLARS) 2006 2005 2004 06/05 05/04
Reported net income $19,337 $ 8,085 $11,361 139 (29)
Purchase accounting
adjustments—
net of tax 3,131 3,967 3,389 (21) 17
Acquisition-related
costs—net of tax 14 599 744 (98) (19)
Discontinued
operations—
net of tax (8,313) (498) (425) M+ 17
Cumulative effect of
a change in
accounting
principles—
net of tax — 23 — * *
Certain significant
items—net of tax 813 2,293 629 (65) 265
Adjusted income $14,982 $14,469 $15,698 4 (8)
* Calculation not meaningful.
M+ Change greater than 1,000%.
Certain amounts and percentages may reflect rounding adjustments.