Pfizer 2006 Annual Report Download - page 35

realize the projected benefits of our Adapting to Scale multi-
year productivity initiative, including the projected benefits of
the broadening of this initiative over the next few years.
We cannot guarantee that any forward-looking statement will be
realized, although we believe we have been prudent in our plans
and assumptions. Achievement of anticipated results is subject to
substantial risks, uncertainties and inaccurate assumptions. Should
known or unknown risks or uncertainties materialize, or should
underlying assumptions prove inaccurate, actual results could
vary materially from past results and those anticipated, estimated
or projected. Investors should bear this in mind as they consider
forward-looking statements.
We undertake no obligation to publicly update forward-looking
statements, whether as a result of new information, future events
or otherwise. You are advised, however, to consult any further
disclosures we make on related subjects in our Forms 10-Q, 8-K
and 10-K reports to the Securities and Exchange Commission.
Certain risks, uncertainties and assumptions are discussed here and
under the heading entitled “Risk Factors and Cautionary Factors
That May Affect Future Results” in Item 1A of our Annual Report
on Form 10-K for the year ended December 31, 2006, which will
be filed in February 2007. We note these factors for investors as
permitted by the Private Securities Litigation Reform Act of 1995.
You should understand that it is not possible to predict or identify
all such factors. Consequently, you should not consider any such
list to be a complete set of all potential risks or uncertainties.
This report includes discussion of certain clinical studies relating
to various in-line products and/or product candidates. These
studies typically are part of a larger body of clinical data relating
to such products or product candidates, and the discussion herein
should be considered in the context of the larger body of data.
Financial Risk Management
The overall objective of our financial risk management program
is to seek a reduction in the potential negative earnings effects
from changes in foreign exchange and interest rates arising in our
business activities. We manage these financial exposures through
operational means and by using various financial instruments.
These practices may change as economic conditions change.
Foreign Exchange Risk—A significant portion of our revenues and
earnings is exposed to changes in foreign exchange rates. We seek
to manage our foreign exchange risk in part through operational
means, including managing same currency revenues in relation to
same currency costs, and same currency assets in relation to same
currency liabilities.
Foreign exchange risk is also managed through the use of foreign
currency forward-exchange contracts. These contracts are used to
offset the potential earnings effects from mostly intercompany
short-term foreign currency assets and liabilities that arise from
operations. We also use foreign currency forward-exchange
contracts and foreign currency swaps to hedge the potential
earnings effects from short and long-term foreign currency
investments, third-party loans and intercompany loans.
In addition, under certain market conditions, we protect against
possible declines in the reported net assets of our Japanese yen,
Swedish krona and certain euro functional-currency subsidiaries.
In these cases, we use currency swaps or foreign currency debt.
Our financial instrument holdings at year-end were analyzed to
determine their sensitivity to foreign exchange rate changes.
The fair values of these instruments were determined as follows:
• foreign currency forward-exchange contracts and currency
swaps—net present values
• foreign receivables, payables, debt and loans—changes in
exchange rates
In this sensitivity analysis, we assumed that the change in one
currency’s rate relative to the U.S. dollar would not have an
effect on other currencies’ rates relative to the U.S. dollar. All other
factors were held constant.
If there were an adverse change in foreign exchange rates of 10%,
the expected effect on net income related to our financial
instruments would be immaterial. For additional details, see
Notes to Consolidated Financial Statements—Note 9D. Financial
Instruments: Derivative Financial Instruments and Hedging
Activities.
Interest Rate Risk—Our U.S. dollar interest-bearing investments,
loans and borrowings are subject to interest rate risk. We are also
subject to interest rate risk on euro investments and currency
swaps, Swedish krona currency swaps, and on Japanese yen short
and long-term borrowings and currency swaps. We invest and
borrow primarily on a short-term or variable-rate basis. From
time to time, depending on market conditions, we will fix interest
rates either through entering into fixed-rate investments and
borrowings or through the use of derivative financial instruments
such as interest rate swaps.
Our financial instrument holdings at year-end were analyzed to
determine their sensitivity to interest rate changes. The fair values
of these instruments were determined by net present values.
In this sensitivity analysis, we used the same change in interest rate
for all maturities. All other factors were held constant.
If there were an adverse change in interest rates of 10%, the
expected effect on net income related to our financial instruments
would be immaterial.
Legal Proceedings and Contingencies
We and certain of our subsidiaries are involved in various patent,
product liability, consumer, commercial, securities, environmental
and tax litigations and claims; government investigations; and
other legal proceedings that arise from time to time in the
ordinary course of our business. We do not believe any of them
will have a material adverse effect on our financial position.
We record accruals for such contingencies to the extent that we
conclude their occurrence is probable and the related damages
are estimable. If a range of liability is probable and estimable and
some amount within the range appears to be a better estimate
than any other amount within the range, we accrue that amount.
If a range of liability is probable and estimable and no amount
within the range appears to be a better estimate than any other
amount within the range, we accrue the minimum of such
probable range. Many claims involve highly complex issues relating
2006 Financial Report 33
Financial Review
Pfizer Inc and Subsidiary Companies