Pfizer 2007 Annual Report Download - page 26

24 2007 Financial Report
Financial Review
Pfizer Inc and Subsidiary Companies
We incurred the following costs in connection with our cost-
reduction initiatives:
YEAR ENDED DEC. 31,
_______________________________________________
(MILLIONS OF DOLLARS) 2007 2006 2005
Implementation costs(a) $1,389 $ 788 $325
Restructuring charges(b) 2,523 1,296 438
Total costs related to our
cost-reduction initiatives $3,912 $2,084 $763
(a) For 2007, included in Cost of sales ($700 million), Selling,
informational and administrative expenses ($334 million),
Research and development expenses ($416 million) and in Other
(income)/deductions—net ($61 million income). For 2006, included
in Cost of sales ($392 million), Selling, informational and
administrative expenses ($243 million), Research and development
expenses ($176 million) and in Other (income)/deductions—net
($23 million income). For 2005, included in Cost of sales ($124
million), Selling, informational and administrative expenses ($151
million), and Research and development expenses ($50 million).
(b) Included in Restructuring charges and acquisition-related costs.
Through December 31, 2007, the restructuring charges primarily
relate to our plant network optimization efforts and the
restructuring of our worldwide marketing and research and
development operations, and the implementation costs primarily
relate to accelerated depreciation of certain assets, as well as
system and process standardization and the expansion of shared
services.
The components of restructuring charges associated with our
cost-reduction initiatives follow:
ACTIVITY ACCRUAL
THROUGH AS OF
COSTS INCURRED DEC. 31, DEC. 31,______________________________________
(MILLIONS OF DOLLARS) 2007 2006 2005 TOTAL 2007(a) 2007
Employee
termination
costs $2,034 $ 809 $303 $3,146 $1,957 $1,189
Asset
impairments 260 368 122 750 750 —
Other 229 119 13 361 261 100
Total $2,523 $1,296 $438 $4,257 $2,968 $1,289(b)
(a) Includes adjustments for foreign currency translation.
(b) Included in Other current liabilities ($1.1 billion) and Other
noncurrent liabilities ($186 million).
From the beginning of the cost-reduction initiatives in 2005
through December 31, 2007, Employee termination costs represent
the expected reduction of the workforce by 20,800 employees,
mainly in research, manufacturing and sales. As of December 31,
2007, approximately 13,000 of these employees have been
formally terminated. Employee termination costs are recorded
when the actions are probable and estimable and include accrued
severance benefits, pension and postretirement benefits. Asset
impairments primarily include charges to write down property,
plant and equipment. Other primarily includes costs to exit certain
activities.
Acquisition-Related Costs
We recorded in Restructuring charges and acquisition-related
costs $11 million in 2007, $27 million in 2006 and $918 million in
2005, for acquisition-related costs. Amounts in 2005 were primarily
related to our acquisition of Pharmacia on April 16, 2003 and
included integration costs of $543 million and restructuring
charges of $375 million. As of December 31, 2007, virtually all
restructuring charges incurred have been utilized.
Integration costs represent external, incremental costs directly
related to an acquisition, including expenditures for consulting
and systems integration. Restructuring charges can include
severance, costs of vacating duplicative facilities, contract
termination and other exit costs.
Other (Income)/Deductions—Net
In 2007, we recorded higher net interest income compared to
2006, due primarily to higher net financial assets during 2007
compared to 2006, reflecting proceeds of $16.6 billion from the
sale of our Consumer Healthcare business in late December 2006,
and higher interest rates. Also in 2007, we recorded a gain of $211
million related to the sale of a building in Korea. In 2006, we
recorded a charge of $320 million related to the impairment of
our Depo-Provera intangible asset. In 2005, we recorded charges
of $1.2 billion primarily related to the impairment of our Bextra
intangible asset. See also Notes to Consolidated Financial
Statements—Note 7. Other (Income)/Deductions—Net.
Provision for Taxes on Income
Our overall effective tax rate for continuing operations was
11.0% in 2007, 15.3% in 2006 and 29.4% in 2005. The lower tax
rate in 2007 is primarily due to the impact of charges associated
with our decision to exit Exubera (see the “Our 2007 Performance:
Decision to Exit Exubera” section of this Financial Review), higher
charges related to our cost-reduction initiatives in 2007, lower non-
deductible charges for acquisition-related IPR&D, and the volume
and geographic mix of product sales and restructuring charges in
2007 compared to 2006, partially offset by certain one-time tax
benefits in 2006, all discussed below.
The lower tax rate in 2006 compared to 2005 is primarily due to
certain one-time tax benefits associated with favorable tax
legislation and the resolution of certain tax positions, and a
decrease in the 2005 estimated U.S. tax provision related to the
repatriation of foreign earnings, all as discussed below, and the
impact of the sale of our Consumer Healthcare business.
In the third quarter of 2006, we recorded a decrease to the 2005
estimated U.S. tax provision related to the repatriation of foreign
earnings, due primarily to the receipt of information that raised
our assessment of the likelihood of prevailing on the technical
merits of a certain position, and we recognized a tax benefit of
$124 million.
In the first quarter of 2006, we were notified by the Internal
Revenue Service (IRS) Appeals Division that a resolution had been
reached on the matter that we were in the process of appealing
related to the tax deductibility of an acquisition-related breakup
fee paid by the Warner-Lambert Company in 2000. As a result, in
the first quarter of 2006, we recorded a tax benefit of
approximately $441 million related to the resolution of this issue.
On January 23, 2006, the IRS issued final regulations on Statutory
Mergers and Consolidations, which impacted certain prior-period
transactions. In the first quarter of 2006, we recorded a tax
benefit of $217 million, reflecting the total impact of these
regulations.